The Recession and Consumer Behaviour
In this essay I will be analysing what affect the recession has had on consumer behaviour and the reasons behind those changes in behaviour. A recession is defined as two successive quarters of negative economic growth, as measured by the gross domestic product (GDP) of the country1. Consumer behaviour can be defined as ‘The study of when, why, how, and where people do or do not buy products.2
The current recession began in December 2007 and originates from the USA‘s mortgage market, mortgages were being offered to people who simply couldn't afford to have one. Consequently the property market collapsed and the economic down turn quickly spread to the rest of the worlds financial system, as a result there is now a global recession3. With the banking world in turmoil there have been repercussions for other industries. For example the car industry is one of the worst hit industries because banks are now being extremely vigilant about lending capital. This means that whilst a consumer may desire a new car they are unable to fulfill those needs because there is no way of them generating the capital which would allow them to make the purchase. This can be illustrated by the fact Toyota has suffered a loss of $4.4 billion4. It is Toyota's first loss in 59 years which further emphasises how bad the current recession is. Furthermore the collapse of the property market hasn't just affected the behaviour of consumers in this industry but it has also had knock on affects. For example because less people are being granted mortgages, due to the fact a 20-30% deposit is needed, there is naturally less demand for new houses to be built because they simply won't be bought in the current climate. The sale of less houses then affects furnishing stores because there are less consumers who need new furniture. It is therefore important to realise that consumer behaviour is linked between industries.
Consumer behaviour will also change during a recession depending on demographics which include age, gender and occupation. Research conducted by Price WaterHouse Coopers suggests the most affected age group is the 60-65+ year olds who are retired or approaching retirement, followed by 18-24 year olds, then 45-60 year olds and finally 25-44 year olds tend to be the least affected by the recession.5 The worst affected are the 60-65+ year olds because the UK government enforces a monetary policy. This means the government regulates the money supply and interest rates to manage the economy6. As OAP's rely on their savings to supplement their pension it means in the current circumstances they are earning substantially less money than they were in previous years because interest rates are currently at 0.5% compared with 4.5% in 20057. This obviously has huge affects on their buying behaviour because they are forced to make cuts which they may not want to make but have to through necessity due to a significantly reduced disposable income. With unemployment soaring during a recession this affects consumer behaviour because individuals become more cautious about their spending due to the fear of unemployment or redundancy. During the current recession it is the 18-24 year olds who are suffering the most with unemployment. However with unemployment rates currently at 7.8%8 the increase in cautiousness, and the fear of unemployment is not isolated to purely this age group as people who have seen friends, family or colleagues lose their jobs share the same emotions and fears that they could be next. This has a huge impact on consumer confidence and therefore consumers will look to reign in their spending. Consumers adjust their frame of mind to being more orientated towards saving money rather than spending money because of the uncertainty which surrounds their future. This affects the consumers behaviour towards products. Luxury products such as top of the range food, cars, clothes and perfumes etc are likely to see sales drop dramatically as consumers look for methods of decreasing their spending whilst maximising how far their budget goes. For example an average family my opt to the drop brand level of food for their weekly shop. So rather than buying the Tesco's Finest range they would buy the Tesco Value range. Research suggests that on average you can save 33% for each product for a one level drop. For a family hit by the recession this would be a significant saving and this highlights how when times are hard value is the most important factor for the consumer and their behaviour will reflect this8.
Whilst many industries are suffering during the recession there are some industries who are actually benefitting from the recession and recording an improvement in performance. This can be associated with the ‘lip stick effect'. The ‘lip stick effect' refers to the fact that during recessions consumers look to replace their expensive big ticket items with more affordable luxuries such as cosmetics which help consumers feel better about themselves. The ‘lipstick effect' was first discovered in the 1930s when the Great Depression occurred and has been evident in the recessions of the 1980s, 90s and and early 2000s which all show during recessions spending on cosmetics increases whilst most other struggle. This can be highlighted by the fact that L'oreal achieved a sales growth of 5.3% year on year for the first half of 20089. The ‘lip stick effect' essentially shows that a consumers behaviour changes from purchasing extravagant big ticket items such as, cars, holidays and kitchens to small ticket items i.e. lipstick. So rather than downgrading the make of the car they drive, they instead downgrade the size of the item they are purchasing. As the consumer is not downgrading in quality it helps to pick them up and feel good about themselves.
In a recession consumers want to be distracted away from the economic headaches which seem to surround them wherever they are and who ever they are with. This means that consumers change their behaviour to seek escapism away from the doom and gloom of the recession. This change in consumer behaviour has once again benefitted some industries more than others. For example the entertainment sector should see an increase in popularity as it offers a good source of escapism. An example of this is the cinema, which can be referred to as the leisure industry's equivalent of lipstick10, and has experienced an increase of 13% year on year in terms of attendance. The cinema is proving popular because it offers escapism in the sense of offering a cheap night out that consumers can look forward to.
During a recession many consumers are forced to down grade their preferences in order to make living financially viable. By looking at the performance of Domino's pizza it is evident to see that consumers are changing their behaviour. Domino's pizza recorded a 25% rise in profits for the first half of 200911. This is a result of cash strapped families opting to stay in and order takeaways as a form of a treat rather than eating out at restaurants and pubs. This means the restaurants and pubs are feeling the brunt of the change in the recession as up to 75% of British families say they will avoid both eating and drinking out of the house12. This doesn't however mean that households are cutting alcohol out of their life. Instead British households are opting to drink at home with the average spend per household thought to be £30 per week13. So the consumers behaviour is changing in the form of where they purchase their products rather than what they are purchasing in this case.
Another sector which has experienced a change in consumer behaviour during the recession is insurance companies whether it be car insurance or household policies. With regard to motor insurance price is still the most important factor for consumers however more and more people consider comprehensive cover and no claims discount protection as important even if the policy does in reality cost more. This is because in times of recession when money is tighter consumers want and need the reassurance that if they are involved in an accident or have their vehicle vandalised or stolen that they will will be able to have it replaced and/or repaired. Without the comprehensive cover consumers may find it impossible to buy a new vehicle or have their vehicle repaired due to not having the disposable income to do so and they would be unable to pay via credit due to the fact banks would refuse them the loan. In essence this is the opportunity cost. With regard to home insurance consumers become more concerned with the level of cover they currently have. Many consumers during a recession want both the property and all of their contents insured. Again this increased level of vigilance with regard to their policy comes from the fact that if there was a fire or burglary the consumer would be unable to afford to replace the contents of what they have lost. Perhaps more interestingly the number of fraudulent claims increased by 17% in 2009 when compared with 2007, whilst 50% of those fraudulent claims were received in the motor insurance sector14.
Another recent development to a change in consumer behaviour has been identified by trendwatching.com as “sellsumers”. This refers to the fact that in a recession saving is the new spending, furthermore generating money from the sale of personal assets and property outshines the prospect of purely saving15. This offers consumers a new and revolutionary solution of how to generate capital, sellsuming effectively offers consumers/sellsumers the opportunity to be a part-time entrepreneur and benefit from a secondary or tertiary income. It could also be used to supplement a temporary primary income whilst the individual is seeking a new work placement. Individuals can achieve this additional income through the use of websites such as eBay which allow sellers to auction any item they desire to sell.
Overall it is extremely important to recognise that consumer behaviour is affected by the recession. However it must be noted that the changes in consumer behaviour are very much dependent on the industry and products concerned. This is highlighted by the aforementioned points, so for example the car industry, construction and property market were the most adversely affected whilst industries which allow escapism benefit from the recession i.e. the entertainment sector and the cinema. With regards to the adversely affected sectors measures were taken to try and increase the activity of consumers. For example the government introduced the scrappage scheme to try and induce greater activity in the car industry by boosting consumer spending. The scrappage scheme offered consumers £2000 off a new vehicle in exchange for having their old car scrapped and individuals must have owned the car for a minimum of 12 months16. In addition to this some car dealers were so desperate to try and move cars off their forecourt that they were offering buy one get one free on on Dodge Avengers17. Another measure taken by the government to try and influence consumer behaviour was to reduce VAT from 17.5% to 15% on December 1st 2008 until the end of 2009. This reduction was implemented to try and encourage big ticket purchases rather than small ticket purchases as a 2.5% reduction on necessity and small ticket items is not really going to be noticeable. Along with a VAT reduction the government along with the Bank of England have cut interest rates to 0.5% in an effort to increase peoples disposable income as individuals will benefit from lower mortgage repayments. Another area where the recession has had a big affect on consumer behaviour is brand loyalty. Due to the fact the majority of the population have less disposable income consumers are placing more emphasis on achieving the greatest possible value rather than supporting the brands that they have developed loyalty towards in the past, consumers are therefore much likely to substitute products during a recession. Businesses also need to be proactive in recessions so that they can try and generate situations whereby they create positive motivation for their consumers and therefore benefit from favourable consumer behaviour towards the firm. This may for example be achieved through the means of irrefutable offers or offering a product of good quality and excellent reliability for a competitive price. Reliability in the height of a recession is a key variable for consumers as they do not want to make an outlay and then have the product fail on them as they may not be able to afford a replacement or repair. Success stories of the recession include: Amazon, supermarkets, Domino's pizza and Cinemas. Finally consumer behaviour will always face being affected. It will be affected depending what stage of the life cycle the economy is at, therefore the only way to reduce the adverse affects and take advantage of the positive affects is for businesses to be adaptable. This way businesses have the best opportunity of helping consumers to achieve equilibrium in the homeostasis see-saw which is ever more difficult to achieve in a recession as consumers face more constraints.
2. Sandhusen, Richard L.: Marketing (2000, S. 218)
3. mark Goode
18. Consumer behaviour book