What marketers really need to know about the credit crunch

LONDON - Using exclusive research from Henley Centre HeadlightVision, Marketing looks behind the gloomy headlines to examine the true impact the economic situation is having on consumer spending and what marketers can do to respond.

What marketers really need to know about the credit crunch

The financial pages make grim reading for the UK marketing community, with headline after headline bemoaning the looming crisis of confidence in the economy. Whereas weak sales might once have simply been attributed to the poor summer, the 'credit crunch' - a term loosely coined to describe the impact of the collapse of the subprime US mortgage market -has now become the core reason cited for any failures.

Media owners, the advertising community and marketers are operating at the sharp end of this crunch. One need only look at newspapers' dwindling circulations and advertising revenues to discover the source of this growing unease. However, this begs the question as to whether we are simply talking ourselves into a recession, with marketers using the economy as an excuse for poor brand performance and weak campaigns.

Research from Henley Centre HeadlightVision, revealed exclusively here, looks behind the headlines to reveal what impact the economic situation is having on consumer spending and what marketers can do to maximise their brand performance in an ever-more uncertain climate.

The current environment is significantly different from the last recession, in 1991. Disposable incomes are considerably higher, unemployment is less widespread and interest rates and inflation are lower and less volatile. Indeed, Henley forecasts a slow growth in household expenditure in 2008 and 2009, compared with the 1.6% decline in expenditure experienced in 1991.

Traditionally, leisure services have been particularly vulnerable during a recession, and in the first quarter of 2008, spend on 'recreational and cultural services' fell. The arts, too, are suffering, as anyone marketing a West End show and trying to ensure a full house every night will confirm. Conversely, spending in restaurants, cafes and pubs has continued to grow.

Economic forecasts for 2009 are not great. In a nation uniquely obsessed with property values, the decline in house prices has had a marked destabilising effect on consumer confidence. However, the areas that put the economy into sharp focus are rising fuel and food prices, which pushed inflation to 4.4% in July - the biggest month-on-month increase for 11 years. This has left consumers with less discretionary income, which presents FMCG brands with a real challenge.

Combined with the astronomical level of consumer debt (personal debt in the UK totalled £1.44tn at the end of June - 7.5% more than for the same month last year), brands have good reason to be jittery. About 84% of this debt is accounted for by secured lending (mortgages), with the remainder by methods such as credit cards unsecured loans. According to the research, consumers have become less comfortable about the amount of debt they are shouldering. Indeed, homelessness charity Shelter estimates that there will be 130,000 personal insolvencies this year.

While the research echoes many leading economists in predicting that the UK will not experience a recession in the technical sense (two consecutive quarters of negative GDP growth), the slowdown will continue well into 2009, and the economy is unlikely to pick up until 2010.

In response to this, a high proportion of consumers are set to 'trade down', by choosing cheaper brands and retailers. However, the willingness to resort to shopping at discount retailers varies by level of anxiety. Eighty percent of consumers categorised as 'panicked' are more likely to trade down, compared with just 34% of 'placid' consumers. In line with this, only 33% of placid consumers say they will eat out less frequently, while even fewer think they will stop shopping for fun and pleasure.

Most consumers are increasingly price sensitive, with 73% paying more attention to the price of the grocery products they are buying. The research also found that 70% of consumers are searching the internet for cheaper prices, choosing products on the basis of special offers, and using coupons and vouchers. Price- comparison websites are being visited by 60% of consumers, while 58% are taking advantage of loyalty cards.

There is no doubt that consumers will be considerably more focused on price over the coming 12 months. During the 1991 recession, coupon firm Valassis reported a 60% rise in the distribution of coupons and a 17% rise in the volume of those redeemed, compared with 1990. Tactical pricing and sales promotion activity may serve to draw new consumers to a brand at a time when loyalty is open to challenge.

Perhaps the single most concerning result for brands is the fact that 60% of consumers say they are going to purchase less over the coming year. Crucially, the research suggests that a small increase in anxiety levels will result in a significant decline in spending. Certain categories are more exposed to the downturn than others: 57% of consumers are less likely to make major purchases, while 49% are less likely to give money to charity.

However, there are clearly pockets of opportunity for brands. For example, consumers are showing a greater interest in repairing and rejuvenating household items they already own, as opposed to simply replacing them. John Lewis recently reported that sales of its £15 silk cushions were up by 13% in the 10 weeks to July, compared with the same period last year. Nat Wakely, the retailer's director of selling operations, said that consumers 'are spending more tarting up their existing furniture'.

Brands such as eBay are also reporting a spike in traffic, as consumers revert to a 'make do and mend' attitude that can include buying second-hand goods.

There has also been an increase in sales of supermarket own-label products, with 60% of those surveyed saying they will consume more of these products over the coming year.

Crucially, this trade-off mentality does not apply to all categories; for example, only 30% of consumers are willing to trade down when buying cars. Moreover, only half of even the most anxious consumers are willing to holiday in the UK next year to save money, as the traditional fortnight in the sun remains sacrosanct.

It is clear that consumers are not responding to the credit crunch in a rational way, and levels of anxiety do not necessarily correlate to real financial security. If brands are to survive, they must avoid making assumptions about purchasing habits. 

Read Will Galgey, Managing Director, Henley Centre, HeadlightVision on How marketers can benefit from the recession