Marketing View: Spending Similarities After The Depression Of The 1930s And The Recession Of 2007 - Part IIByRaymond D. Matkowsky
In Part I of this series I compared the behavior of the 1930s Depression survivors to those that lived through the great Recession of 2007. Part I can be found by clicking here. The behaviors are very similar and marketing executives should take notice.
Depression era survivors saved more and consumed less of their disposable income. For years the American public has been told that they do not save enough. True. The average savings rate in 2005 was only 1.9% of disposable income. I will remind you that consumer spending accounted for 70% of the United States Gross Domestic Product. A person saving more money is a problem for marketers though. As savings go up, spending goes down. The personal savings rate has reached 5.5% in December of 2016. This is the highest level in three years and the economy is feeling the drag.
Real Spending, Interest Rates are down; Savings are Up
After inflation, real spending only rose 0.1% in November 2016. The United States Bureau of Economic Analysis reports that the third quarter slowdown in spending was primarily in non-durable goods. Also slowing down was pharmaceuticals, household supplies, and tobacco products. There was a small decrease in single family structures. Unexpectedly, durable goods orders also plunged 0.4% in December 2016.
The personal savings rate was reflected in this past Christmas sales. Retail sales ex-autos were very weak during the December 2016 Christmas season, inching up only 0.2%.
The United States Federal Reserve Bank does not expect interest rates to exceed 1.3% a year by 2020. Baby Boomers are just beginning to retire. This trend will be continuing for the next 20 years. For years, they were told to save money, plan to live off their interest, and never touch their principal. This was a time when interest rates were ranging between 5 to 6% a year. They have been left “swinging in the wind” and can no longer follow through on that plan. Some will not have enough money to survive. Many still have assets. But, you could be assured that they will be very careful with their spending.
Predicting the Economy
Thomas Sowell once said: “Economists are often asked to predict what the economy is going to do. But economic predictions require predicting what politicians are going to do – and nothing is more unpredictable.”
Many analysts have ignored the potential political aspects on marketing predictions for 2017. As a marketer you need to pay attention to this. Consumer confidence has increased during the final few months of 2016. Much of this increase is due to the election of Donald Trump. As fast as this confidence index rose, it can decline steeply just as fast. Most major actions take a lot longer to implement than most Americans seem to appreciate. This will lead to a lot of disappointment. I feel that the impact of such a disappointment will be quite severe on the economy.
There is another factor that has to be considered. Donald Trump is not the first businessman with no previous political experience to be elected President of the United States, Herbert Hoover was. Hoover defeated Al Smith of New York by a very wide margin. Trump defeated Hilliary Clinton by a wide margin in the Electoral College, but lost the popular vote by 2.5 million voters. The similarities between Trump and Hoover are quite striking.
Hoover was a rich mining engineer with business interests throughout the world as does Donald Trump. Both had problems with México. Hoover deported over 500,000 undocumented Méxicans. Trump has threaten to do the same. Hoover imposed tariffs that started a trade war that cut U.S. exports by 50%. Trump has also threaten to impose new tariffs. The Depression of the 30s started seven months after Hoover took office. Hoover’s actions were not the sole cause of the depression. But, his policies were a major contributor in accelerating and deepening it. Hoover was voted out of office by a five to one margin after one term.
At Data Stats, we do not believe a depression is in the U.S. future. However, we also believe that the economy has not been preforming as well as some would want you to think and that a recession is on the way. This will drag the economy down even further besides destroying built up confidence.
Failing Businesses
Iconic stores are closing left and right or are in bankruptcy. Among the treasured names is Macy’s®, J.C. Penny®, Sears® Holding Company, Kmart®. These stores are feeling the pressure from discounters such as Costco®, Walmart®, T.J. Max® and its sister stores, etc.. The first list of stores have one thing in common. The second list of stores have another thing in common. My belief is that the difference between these two factors determines whether their strategies succeed or fail.
The first list of companies operate on a 30% to 40% markup. The second list of companies operate on a 10% markup. In order to compete successfully, you will have to lower your markup to that of or below the competition. Closing stores by itself will not stem the red ink if there is a lower cost alternative nearby or if the same item can be ordered online (which is almost any item.) High markup stores will keep some of their older customers for nostalgic reasons, but they will not get any new ones. As a marketer, you will have to lower your markup before you undertake any other cost saving strategies. This is just as true for Business to Business (B to B) sales as it is for Business to Consumer (B to C) sales.
Lowering your markup will not be enough though. It will only level the playing field. At this point each marketing situation is different. First of all, you will have to do something to make up for the lost markup. This may be as simple as developing a new advertising campaign stressing value for a lower price that brings in new customers that you would have never gotten before (think supermarkets: low markup; high volume). Give the customer a reason to choose you over someone else. Those reasons are extensive and may cost very little.
Adapt to New Desires
Shift your product mix away from products whose sales are declining such as luxury items. Focus more on a different segment of customers and what they value. Sell new items. J.C. Penny® started selling home appliances. This is a drastic departure from their typical product mix.
Do not forget customer service! More than a year ago, I dropped a thirty year vendor because of repeated poor customer service. I spent a number of years in technical service and I will tell you that the typical service that you get today is nowhere near the quality of service that was given just a few years ago. Your service does not have to be costly. But, it may differentiate you from your competitors. You do not have to have a special department devoted solely to service. Your service can be as simple as having your employee refer one person to another that might help.
Since every business has unique requirements, since every product can be distinctive, only you can decide what is possible and what is not. However, do not fall into the “we’ve always done it that way” trap. It should be clear that you may not be able to continue doing what you have always done and succeed at overtaking your competition. Don’t forget your competition may not be the guy down the street, but the one a continent away.
Once you have your strategies lined up, it would now be time to optimize every link of the product chain. You want to do this so you get every penny of potential profit there is. Remember, every penny saved is another penny going into your bottom line!
If you have any further suggestions, do not keep it to yourself. Help your fellow readers!
If you have any questions, comments or suggestions drop me a line at rdm@datastats.com.
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