Consumers who are comfortably wealthy are confident in their ability to weather present and future economic storms. They continue to consume at near-pre-recession levels, while they are becoming more selective (and less visible) in their purchases. People in the top 5% of the income distribution make up the majority of this group. It also includes those who are less rich but are assured in their financial securityfor example, the comfortably retired or those who exited the stock market early or put their money in low-risk products like CDs.
The live-for-today sector continues as usual, unconcerned with savings for the most part. Consumers in this group respond to the recession by deferring large purchases for a longer period of time. They are typically urban and younger, preferring to rent rather than buy, and prefer to spend money on experiences rather than things (with the exception of consumer electronics). Unless they lose their jobs, they are unlikely to change their consuming habits.
Consumers prioritize consumption by categorizing products and services into four categories, regardless of which group they belong to:
Postponables are objects that are required or wanted but can be delayed.
Basic levels of food, shelter, and clothes are considered important by all customers, and most would include transportation and medical care in that category as well. Aside from that, the classification of specific items and services into the various categories is very unique.
During a downturn, all consumers, with the exception of those who live for today, rethink their spending priorities. We know from previous recessions that products and services like restaurant dining, travel, arts and entertainment, new clothing, automobiles, appliances, and consumer electronics can quickly shift from necessities to treats, postponables, or even expendables in the minds of consumers, depending on the individual. Consumers may completely forgo purchases in specific categories, such as household services (cleaning, lawn care, snow removal), as their priorities shift, transforming them from basics to expendables. Alternatively, individuals may exchange purchases from one category for purchases from another, such as dining out (a reward) for cooking at home (an essential). Moreover, because most customers become more price sensitive and less brand loyal during recessions, they are likely to seek for lower-cost versions of their favorite items and brands or settle for less desirable alternatives. They might, for example, opt for less expensive private labels or switch from organic to nonorganic items. (See the exhibit “Changing Consumer Segment Behavior.”)
In a downturn, what do individuals spend their money on?
People are buying and this time, stocking up on food, toiletries, and other vital products, as they have in prior recessions. What’s more, purchasing patterns outside of basics indicate that consumers expect they’ll be remaining at home for a long time.
What is the best asset to have during a downturn?
- Most investors should avoid investing in highly leveraged, cyclical, or speculative companies during a recession, as these companies have the highest likelihood of doing poorly during difficult economic circumstances.
- Investing in well-managed companies with little debt, high cash flow, and robust balance sheets is a superior recession strategy.
- In a downturn, counter-cyclical equities do well and see price gain despite the economic challenges.
- Some businesses, such as utilities, consumer staples, and discount merchants, are thought to be more recession-resistant than others.
What is the impact of the recession on consumers?
Many customers are severely in debt and have little to no savings during a recession. As a result, they want to keep as much money as possible. Some consumers have drastically reduced their credit card spending, while others are unable to pay their monthly credit card bills. Reduced spending and defaulting on credit card agreements have a negative impact on consumers, but it also adds to the financial pressure on banks during a recession.
In a downturn, who benefits?
Question from the audience: Identify and explain economic variables that may be positively affected by the economic slowdown.
A recession is a time in which the economy grows at a negative rate. It’s a time of rising unemployment, lower salaries, and increased government debt. It usually results in financial costs.
- Companies that provide low-cost entertainment. Bookmakers and publicans are thought to do well during a recession because individuals want to ‘drink their sorrows away’ with little bets and becoming intoxicated. (However, research suggest that life expectancy increases during recessions, contradicting this old wives tale.) Demand for online-streaming and online entertainment is projected to increase during the 2020 Coronavirus recession.
- Companies that are suffering with bankruptcies and income loss. Pawnbrokers and companies that sell pay day loans, for example people in need of money turn to loan sharks.
- Companies that sell substandard goods. (items whose demand increases as income decreases) e.g. value goods, second-hand retailers, etc. Some businesses, such as supermarkets, will be unaffected by the recession. People will reduce their spending on luxuries, but not on food.
- Longer-term efficiency gains Some economists suggest that a recession can help the economy become more productive in the long run. A recession is a shock, and inefficient businesses may go out of business, but it also allows for the emergence of new businesses. It’s what Joseph Schumpeter dubbed “creative destruction” the idea that when some enterprises fail, new inventive businesses can emerge and develop.
- It’s worth noting that in a downturn, solid, efficient businesses can be put out of business due to cash difficulties and a temporary decline in revenue. It is not true that all businesses that close down are inefficient. Furthermore, the loss of enterprises entails the loss of experience and knowledge.
- Falling asset values can make purchasing a home more affordable. For first-time purchasers, this is a good option. It has the potential to aid in the reduction of wealth disparities.
- It is possible that one’s life expectancy will increase. According to studies from the Great Depression, life expectancy increased in areas where unemployment increased. This may seem counterintuitive, but the idea is that unemployed people will spend less money on alcohol and drugs, resulting in improved health. They may do fewer car trips and hence have a lower risk of being involved in fatal car accidents. NPR
The rate of inflation tends to reduce during a recession. Because unemployment rises, wage inflation is moderated. Firms also respond to decreased demand by lowering prices.
Those on fixed incomes or who have cash savings may profit from the decrease in inflation. It may also aid in the reduction of long-term inflationary pressures. For example, the 1980/81 recession helped to bring inflation down from 1970s highs.
After the Lawson boom and double-digit inflation, the 1991 Recession struck.
Efficiency increase?
It has been suggested that a recession encourages businesses to become more efficient or go out of business. A recession might hasten the ‘creative destruction’ process. Where inefficient businesses fail, efficient businesses thrive.
Covid Recession 2020
The Covid-19 epidemic was to blame for the terrible recession of 2020. Some industries were particularly heavily damaged by the recession (leisure, travel, tourism, bingo halls). However, several businesses benefited greatly from the Covid-recession. We shifted to online delivery when consumers stopped going to the high street and shopping malls. Online behemoths like Amazon saw a big boost in sales. For example, Amazon’s market capitalisation increased by $570 billion in the first seven months of 2020, owing to strong sales growth (Forbes).
Profitability hasn’t kept pace with Amazon’s surge in sales. Because necessities like toilet paper have a low profit margin, profit growth has been restrained. Amazon has taken the uncommon step of reducing demand at times. They also experienced additional costs as a result of Covid, such as paying for overtime and dealing with Covid outbreaks in their warehouses. However, due to increased demand for online streaming, Amazon saw fast development in its cloud computing networks. These are the more profitable areas of the business.
Apple, Google, and Facebook all had significant revenue and profit growth during an era when companies with a strong online presence benefited.
The current recession is unique in that there are more huge winners and losers than ever before. It all depends on how the virus’s dynamics effect the firm as well as aggregate demand.
During the Great Depression, what did people buy?
Many people have claimed that the Great Depression was caused by the stock market crash or President Hoover’s “hands off” policy of the government staying out of economic concerns, but this is simply not true. The Great Depression was brought on by a mix of economic problems and bad luck, and it had a global impact. A handful of the major reasons of the Great Depression are listed here.
Buying on Credit
Buying anything on credit means taking out a loan to pay for it. A bank lends you money and then expects you to repay it plus interest. Borrowing money comes with a price called interest. The issue is that farmers were not the only ones who purchased items on credit. Credit was utilized by millions of Americans to purchase items such as radios, refrigerators, washing machines, and automobiles. Banks even used credit to purchase stock on the stock exchange. This meant that everyone used credit, and no one, not even the banks, had enough money to repay all of their loans.
World War I and Over Production
Before World War II, World War I was the largest war the world had ever seen. During the battle, millions of people fought and died. There were not enough farmers growing food for everyone since there were so many people fighting. As a result, the cost of food increased, prompting remaining farmers to purchase additional land and new tractors in order to increase their profits. They purchased the land and tractors with bank loans, believing that they would be able to repay the banks fast. When the war ended, food prices fell again, forcing farmers to take out more and more loans to cover the cost of all the land and equipment they had purchased. No one felt this was a problem as long as the farmers continued to raise crops and earn enough money to repay the banks.
In a downturn, how do you make money?
During a recession, you might be tempted to sell all of your investments, but experts advise against doing so. When the rest of the economy is fragile, there are usually a few sectors that continue to grow and provide investors with consistent returns.
Consider investing in the healthcare, utilities, and consumer goods sectors if you wish to protect yourself in part with equities during a recession. Regardless of the health of the economy, people will continue to spend money on medical care, household items, electricity, and food. As a result, during busts, these stocks tend to fare well (and underperform during booms).
Should you invest in stocks during a downturn?
In a downturn, the manner in which you invest is just as crucial as the type of investment you make. Stocks are notoriously volatile during recessions, as anyone who was involved in the market during the 2008-09 financial crisis will attest.
Invest in little increments rather than trying to time the market. Dollar-cost averaging is a method that involves investing equal dollar amounts at regular intervals rather than all at once. If prices continue to drop, you’ll be able to take advantage and buy more. And, if prices begin to rise, you’ll finish up buying more shares at cheaper prices and less shares as your preferred equities rise in value.
In a word, a recession might be an excellent moment to purchase high-quality company stocks at bargain rates.
Do individuals buy less during a downturn?
It’s more crucial than ever during a recession to recognize that loyal customers are the primary, long-term source of cash flow and organic growth. Marketing isn’t an optiona it’s “good expenditure” that’s required to bring in income from these and other critical customers.
Despite this, marketing is frequently disproportionately affected by firm budget decreases. Marketing communication costs can be reduced faster than manufacturing costsand without laying off employees. Businesses must, however, discern between the necessary and the unnecessary when managing their marketing expenses. One of the most effective strategies to reduce business risk is to build and maintain strong brands that customers recognize and trust. During recessions, the stock prices of corporations with well-known names, such as Colgate-Palmolive and Johnson & Johnson, have held up better than those of huge consumer product companies with lesser-known brands.
Surgical budget cuts are easier to make during a downturn than they are during a boom. During difficult circumstances, it’s critical to fire weak workers and eliminate low-yield strategies. It’s simpler to secure companywide buy-in for modifying marketing tactics and reallocating assets when survival is on the line. Instead than relying on the next line extension, managers can resist outdated mindsets and creatively search for greater solutions to client needs. The task at hand is to offer well-supported, case-by-case suggestions about where to cut spending, where to maintain it, and even where to increase it.
Assess opportunities.
Start with a triage of your brands, products, and services. Determine which businesses have a poor chance of surviving, which may experience a drop in sales but can be stabilized, and which are likely to thrive during and after the crisis.
During a downturn, your strategy options will be heavily influenced by which of the four segments your main clients fall into and how they classify your products or services. For example, value-brand goods supplied to slam-on-the-brakes consumers, who will forego premium brands in favor of cheaper pricing, have a promising future. Value brands can also effectively reach out to disgruntled but patient consumers who previously purchased higher-end items, a method Wal-Mart actively employed during the 2001 recession with its “everyday low prices” philosophy. Postponable products present potential for value brands as well. Repair services can appeal to those who are frustrated yet patient, preferring to extend the life of a refrigerator rather than purchasing a new one.
When business chances are uncertain or dwindling, it may be time to let go of brands or products that were struggling before the recession and are now on life support. Companies that remain should focus their marketing resources on being relevant to core customers in order to keep their brands alive during the recession and into the recovery.
Allocate for the long term.
When sales start to fall, businesses should not panic and change their brand’s core offer or posture. For example, marketers catering to the pained-but-patient portion of the middle- or upper-income client may be tempted to migrate downmarket. This could perplex and alienate loyal customers; it could also elicit strong opposition from competitors whose operations are tailored toward a low-cost strategy and who are intimately familiar with budget-conscious clients. Marketers who stray from their current consumer base may gain some new customers in the short term, but they will be in a weaker position once the recession is over. The best line of action for them is to keep the brand stable. Even cash-strapped businesses would be prudent to devote a significant percentage of their marketing budget on reinforcing the main brand promise. Reminding customers of the importance of the brand can add to the cushion given by prior brand investments and customer happiness. De Beers realized this after cutting its marketing expenditure in the United States early in 2008 in reaction to the bleak economic outlook. When research found that the majority of consumers regard diamonds as having lasting value, the company increased its Christmas advertising spending by a factor of two over the previous year. “Here’s to less,” said a brand-awareness campaign in many media, urging us to acquire “fewer, better things” because “a diamond is everlasting.” Although Christmas sales in the United States were down from the previous year, prices remained consistent, and consumer demand for diamonds remained strong.
Firms should press their advantage where opportunities are stable or uncertain (but tending toward stable). Consumer goods companies who were able to increase share of voice by maintaining or increasing their advertising investment throughout previous downturns were able to take market share from weaker competitors. Furthermore, they did so at a cheaper cost than when the economy was booming. Increases in marketing investment during a recession have, on average, resulted in improved financial performance throughout the year following the slump. (Of course, not every increase has resulted in improved performance.) As a result, resources should be wisely targeted to feasible business possibilities, especially in the current harsh recession.) Firms with a large budget might make cost-effective acquisitions to expand their brand portfolio or consumer base. During the 2001 recession, Smucker’s bought Procter & Gamble’s Jif and Crisco brands. These brands were too small for P&G and didn’t fit into any of their key categories, but they worked out well for Smucker’s. During this recession, Smucker’s is acquiring another P&G brand, Folgers. Though it does not match P&G’s margin standards, it has the potential to be a significant source of future sales for Smucker’s with renewed marketing attention.
It’s vital to track how customers are reevaluating priorities, reallocating expenditures, switching between brands and product categories, and redefining value when selecting which marketing methods to use. As a result, continuing to invest in market research is critical. Consumers will regain purchasing power once the recession ends, but they may not return to their old shopping habits. Market research should look at whether customers would return to known brands and products, stick with substitutes, or embrace new ideas.