Reevaluating consumer spending in a recession by Interbrand

Reevaluating consumer spending in a recession: What to do with your brand now

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Reevaluating consumer spending in a recession: What to do with your brand now by Helen Lowham and Megan MacLennan

Both the traditional media and blogosphere are burning with speculation on the status of the U.S. economy – are we or aren’t we still in a recession? How quickly can the economy recover from the past three years of contraction and chaos? Regardless of the hard statistics, the majority of Americans believe that we are still in a recession.1 September 2010 reports may show that the economy is improving slightly, but a rise in unemployment from 9.5 to 9.6 percent paints another picture to most Americans.

economic conditions in flux, how can brands continue to remain relevant – and how can they best position themselves for success once the recession clouds clear? Gauging the mood Could optimism be the antidote? Sixty-two percent of the American public believes their financial situation will improve over the next year, and 61 percent believe the damage the recession has inflicted on the U.S. economy will prove to be temporary rather than permanent.2

accounts are up, consumer credit is stable and mortgage debt has plunged. More than one in six Americans say they have cut back on their spending since the recession began in December of 2007. 71 percent of consumers say they have bought less expensive brands in an effort to save money, and 44 percent of Americans say the recession has caused changes in the way they live.3 (See Figure 1)

While consumers have increased spending slightly in the past year, they are still wary. Household spending is down, savings

Interested in understanding consumer spending at a more in-depth level, Interbrand conducted a focused consumer spending survey in July 2010 to identify how U.S. consumers plan to continue to spend, where they are cutting costs, and on which categories. While there appears to be a decrease in the degree to which consumers are cutting their spending, 44 percent of survey respondents say they still have held off making a particular purchase due to the economy. Of those, the majority refrained from spending on non-essential personal or household items, the most frequently mentioned of which include vacations,

1 “How the Great Recession Has Changed Life In America”, The Pew

2 “How the Great Recession Has Changed Life In America”, The Pew

3 “How the Great Recession Has Changed Life In America”, The

Research Center, June 30, 2010, pg. 3.

Research Center, June 30, 2010, pg. 8.

Pew Research Center, June 30, 2010, pg. 4.

So ”save more, spend less” is the mantra of the day. Consumers are forced to make more deliberate, calculated decisions about how and where they spend their money. Interbrand’s late 2008 study “Consumer Spending in a Recession” highlighted how successful brands have capitalized on market downturns by staying committed to their corporate and brand strategy, remaining steadfast in pursuit of their long-term corporate vision, and ultimately enhancing their brand’s equity and position in the market. But with the downturn lingering and

Faced with uncertain economic conditions whose prognosis seems to change daily, consumers are continuing to alter their spending habits to gain a sense of security and safeguard against potential loss. As the recession subsides, these habits are likely to change. Will their purse strings loosen once the economy picks up, or will consumer hesitancy continue beyond the recession?

Reevaluating consumer spending in a recession: What to do with your brand now

electronics, home purchases/renovations and luxury apparel. What consumers are willing to spend on Despite holding-off on big-ticket purchases, consumers have been reluctant to decrease spending on certain categories that are considered either life-essentials or related to health. Top of mind items for consumers include: housing, OTC medications/ vitamins, prescriptions/medications and non-alcoholic beverages. (See Figure 2) Similarly, although consumers are spending less overall since the recession hit in December of 2007, there are certain brands to which consumers are most loyal. Interbrand survey respondents specifically pointed to brands in electronics, cosmetics, food and personal care categories as those to which they remain loyal. Brands at the top of the list are: • Coca-Cola (8.6 percent of responses) • Apple (5.7 percent of responses) • Pampers (5.7 percent of responses) Other brands mentioned repeatedly include those in the apparel, cosmetics, and personal care categories. When compared to Interbrand’s 2008 study, many of the same brands have retained their high consumer loyalty rankings: Apple, MAC Cosmetics, Dove, Bare Escentuals and Coca-Cola all appear again this year as brands referenced repeatedly by survey respondents.

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There are some categories, however, where consumers are willing to switch to private label and store brand products in an effort to save. Household products and groceries are at the top of this list, followed closely by OTC medications and vitamins. (See Figure 3) As one survey respondent commented, “it’s hard to mess up the manufacturing of a paper towel. TVs are another matter.” In addition to consumer-loyal brands, there are certain items that consumers will splurge on. Interbrand survey respondents were asked to list the items they “always splurge on” regardless of the economic conditions. These items are considered “indulgences” on which consumers enjoy spending their money, but are typically non-essentials. It is within these categories that spending is most likely to be curtailed during a recession. As in 2008, clothing, cosmetics, restaurants, food/wine and spa services top the list of indulgences that consumers refuse to give up. When spending on an indulgence, consumers experience a set of positive feelings or emotions. Interbrand respondents indicated that these purchases make them feel happy, confident, healthy, indulgent, pampered and safe, among many other adjectives. For a brand to maintain its strength in an economic climate where consumer spending is stagnant, it is essential for a brand to create and sustain this positive emotional connection with the

Figure 1: Impact of the recession (percent of respondents impacted by each facet of the recession) Lost home to foreclosure Moved back in with parents* Postponed marrying/having a baby Increased credit card debt to pay bills Had problems paying rent/mortgage Borrowed money from friends/family

Series 1

Had trouble paying medical bills Spent less on alcohol/cigarettes Loaned money to someone Cut back/cancelled vacation Bought less expensive brands 0 *Among ages 18-29

consumer to keep them coming back for more. What to do with your brand now When asked to predict their spending pattern once the economy improves, nearly one-in-three respondents admit that they plan to spend less than they did before the recession began, while just 12 percent say they plan to spend more.4 While the impact of the recession and its legacy will vary depending on a brand’s category and loyalty rates, there are several key learnings that can help drive the success of a brand in this fluctuating economy: 1. Position your brand as the no-compromise solution Interbrand’s 2009 article, “Consumer Spending in a Recession,” noted that one way consumers may be able to curtail spending is by replacing more expensive, name-brand products with less expensive, store-brand or privatelabel alternatives. The reality is, less expensive brands that don’t appear to be cutting quality are thriving. Take Whole Foods’ 365 Everyday Value private label brands. Positioned within the value price tier for Whole Foods, this brand is still perceived by consumers as a high quality product given its organic ingredients and association with the larger parent brand of Whole Foods. The brand is viewed as a “no compromise” price-saver – the consumer does not have to sacrifice on price, quality, taste or well-being. Brands that play in this mid-range pricing tier and position themselves as a brands that don’t sacrifice quality for price, have the potential to retain loyal consumers while also widening the net for potential target consumers. 2. Consumer trust leads to loyalty Many articles have focused on negative emotions, like fear, driving decisionmaking during the downturn. Decisions to cut costs, reduce spending, save cash and eliminate chance are, in large part, driven by business and consumer fear 4 “How the Great Recession Has Changed Life In America”, The Pew Research Center, June 30, 2010, pg. 3-4.

Reevaluating consumer spending in a recession: What to do with your brand now

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In the long term, staying true to the authenticity of your brand will keep loyal consumers coming back for more.

of the next downward swing. Similarly, when consumers purchase a product, it is the emotional connection that helps drive their purchasing and keeps them brandloyal. However, as Warren Baxter notes, when squeezed by economic uncertainty, this emotional connection to a brand gets tested and potentially strained.5

• Stay the course; do not abandon the long-term strategy. History shows that those brands that have changed their strategy to appease short-term needs end up failing in the long-term because they lose the customers that helped them build in brand and who were loyal to them when times were good. Stay true to your vision through the ups and downs and your brand will be better poised to succeed once the economy rebounds.

To maintain the emotional connection and strengthen trust, a brand must remain true to its promise, instilling a sense of loyalty within consumers. When consumers are particular about where they spend their money, this adherence to brand promise is vital to a brand’s health.

• Maintain or increase marketing. Brands that keep their presence when competitors go silent traditionally

To remain true to your brand promise, it is important that brands keep the following in mind: Figure 2: Changes in spending over past 18 months (percent of respondents)

100% 80% 60% 40% 20% 0% Apparel & shoes - luxury

Apparel & shoes - basic

Vacations

Personal care services (spas)

Entertainment (movies shows)

Dining out

Non-alcoholic beverages

Prescription medications

OTC Medications & vitamins

Housing

Increased Spending No Change in Spending Decreased Spending

excel and set themselves up to rebound more quickly when the economy picks up. Historical examples include Jif peanut butter and Kraft salad dressing; both increased their advertising during the recession from 1989-1991 and experienced sales growth of 57 percent and 70 percent respectively. Additionally, during a time when most of the beer industry cut budgets, Coors Light and Bud Light increased theirs and saw sales jump 15 percent and 16 percent respectively. Among fast food chains, Pizza Hut sales rose 61 percent and Taco Bell’s 40 percent thanks to strong advertising support, reducing McDonald’s sales by some 28 percent. Hold the line or increase marketing during a recession and reap the rewards.6 • Be real. Stay true to your brand’s central value proposition and don’t dilute your brand’s value. As Warren Baxter notes, “if you brand is about luxury and exclusivity, offering low-end products to attract more buyers will only decrease consumers’ perceived value of your brand.”7 In the long term, staying true to the authenticity of your brand will keep loyal consumers coming back for more. Tylenol is a brand that has successfully built consumer trust through effective 6 Daye, Derrick and VanAuken, Brad, “Recession Marketing Success Requires Boldness,” April 20, 2009.

5 Baxter, Warren, “Building Your Brand in a Recession”, The Karo

7 Baxter, Warren, “Building Your Brand in a Recession”, The Karo

Group, Summer 2009.

Reevaluating consumer spending in a recession: What to do with your brand now

marketing. Faced with increasing competition from other brands and private labels, and a sometimes-negative perception of reliability and safety among consumers, Tylenol began distributing product samples to doctors’ offices and hospitals across the country in the 1980s in a large-scale marketing effort. With samples in hand, doctors and hospitals distributed Tylenol to patients, and, in effect, passively recommended the product. This provided the platform for Tylenol to market its product as the brand that hospitals and doctors recommend most, and drove consumers to adopt the mindset of “if Tylenol is good enough for my doctor, it is good enough for my family and me.” Consumer trust and consequential brand loyalty were thus established during what could have been a time of downfall for the brand. In the wake of this innovative marketing campaign, Tylenol now represents more than US $145 million business for Johnson & Johnson and continues to rank as one of the “most trusted and recommended brands” in the U.S. by consumers.8 ,9 3.Communicate performance to justify price Whenever consumer purchasing becomes more deliberate, brand performance (and perception thereof) is essential to ensure brand success. Again, remaining true to a brand’s central value proposition is essential in a recession. Rather than lowering price and potentially diminishing a brand’s value, communicate that your brand’s performance and reliability are worth its price. This strategy works best in categories where performance is a central driver of purchase behavior, such as electronics, medications/ personal health and family care. Interbrand survey respondents communicated that four factors are deterrents to shifting to a lowerpriced alternative: the product complexity, its quality, its need to perform and the potential risk of switching. There is a fear that lowerpriced brands may not have the same quality level and may not perform as well as leading 8 Gianatasio, David, “Morgan Stanley Picks Martin Agency,” Ad Week, March 3, 2010. 9 Wong, Elaine, “CPG Brands Rate High for Trust”, Brandweek, February 23, 2010.

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brands. For a performance-driven brand to remain viable in the recession, it is important to remind consumers of your brand’s superior quality. In the diaper category, there’s very tangible risk associated with poor quality and performance – if the diapers are not absorbent enough and underperform, they require more frequent changes and create a mess, consequently increasing the amount of time, emotional energy and financial cost to the consumer. Pampers realized this was a key driver of choice and adopted a strategy of reiterating their superior performance versus competitors. Messaging to consumers reinforced the central value proposition of the brand: Although Pampers may be slightly more expensive than competitors, its diapers absorb more and last longer, ultimately costing less time and money in the long run. This messaging tactic underscored the perception of the product’s quality, while also demonstrating to consumers a concern for people’s real lives though a discussion of convenience and ultimate cost savings. In the end, consumers believed that – although they were paying a bit more – they were getting a higher quality product with superior performance.

Conclusion To succeed in a recession and beyond, brands must remain true to their central value proposition and promise. By continuing to market against this end, companies have an opportunity to distinguish themselves in an environment where other brands are going silent and fading into the background. During a time when consumers are particular about where they spend their money, companies must strive even harder to retain existing consumers and grow market share. Instilling consumer trust and touting superior performance despite a brand’s pricing (whether low or high) are all means by which brands can clearly differentiate themselves versus competitors and ultimately strengthen the quality and market position of their brands in the recession and beyond. With the clouds of recession seeming to part, holding ground as the downturn lingers and positioning for the rebound are critical to ensure brand strength once Americans begin spending again. ■

Figure 3: Likelihood to switch to private label or store label brand, by category (percent of respondents for each behavior)

100% 80% I switch all the time 60%

I’d probably switch I’d consider switching

40%

I would probably not switch

20%

I would never switch

0% Cosmetics

Electronics

Groceries

Hair care products

Household OTC products medications & vitamins

Personal care products

Helen Lowham Helen Lowham is an Associate Director on the Strategy team at Interbrand. In this role, Helen provides strategic guidance to clients on brand engagements across a variety of sectors. Since joining Interbrand in June 2008, Helen has worked with clients to address their challenges in the areas of brand architecture, brand strategy, brand portfolio rationalization and customer experience mapping.

Megan MacLennan Megan MacLennan is a Consultant in the Strategy department at Interbrand. She has experience with both traditional management consulting and brand management engagements, including white space opportunity identification, portfolio rationalization, and market launch strategy projects. Meganâ&#x20AC;&#x2122;s experience additionally spans into organization development given her work on internal branding strategies and employee engagement.

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