Using averages can be a poor marketing strategy

In a time of recession, and when business confidence is low, we know consumers begin to tighten their belts and demand falls across the economy. There are several measures of recession.  The US National Bureau of Economic Research (NBER) defines an economic recession as: a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. Other economic bodies define recession as a contraction in GDP over two successive quarters (6 months). A depression, such as occurred in the 1930s, is both deeper and longer lasting than a recession. The US president Harry S. Truman said that a ‘recession is when your neighbour loses his job; depression is when you lose yours. ‘

The following GDP data from tradingeconomics.com graphically indicates contrasts between the economic performance of different countries and regions. Of course, the problem with measuring the overall economic performance of a country is that there are significant differences between individual groups and geographic areas within that country. Contrasting performance between groups and regions will be exacerbated when figures are provided at a global level, and it is unlikely that the message that some groups and/or countries are still doing very well, will be adequately communicated when national or international statistics are reported in the news media. For example, although Greece and Italy are in economic turmoil, significant enough to bring down their governments and to raise the spectre of national default on loans, there will be individuals and groups within those countries whose incomes are increasing substantially.

So, a fall in GDP and, therefore, average incomes does not necessarily reflect the plight of all of a country’s population. Averages mask variation and spread. In addition, because the measurement of economic performance are so complex and since forecasting methods are open to statistical error and interpretation, commentators can reach different conclusions about the state of an economy and its future. For example, the present economic position of the US economy is difficult to decipher. On December 7th, a Bloomberg lead article reported on a poll which concluded that:

The U.S. receives its highest rating from international investors in more than two years on new optimism that the world’s largest economy will weather the financial crisis in Europe and avoid a recession in 2012.

On the same day, former Federal Reserve Chair Paul Volcker stated that there was an ‘ongoing recession in the U.S. and that we will be seeing inflation in the future because of the actions of the Fed and Treasury during the 2008 Credit Crisis. We’re not going to end the recession in the next month or the next year. It’s going to take several years before the recession is over.’

At a time when some members of the European Union are in economic meltdown, there have been encouraging signs of economic growth in the Eurozone’s top two economies. In the latest official GDP figures for the third quarter, Germany’s economy – Europe’s biggest – grew by 0.5%, driven by strong domestic demand and improved consumer spending with second quarter growth being revised upwards from 0.1% to 0.3%. France’s economy grew by 0.4% quarter-on-quarter in the third quarter following a revised contraction of 0.1% in the previous three months; meaning that France avoided a technical recession. Europe represents 28% of world GDP on a PPP (purchasing power parity) basis, and although growth is still evident, there are presently no countries in Europe with a budget surplus, so it is likely that most will be introducing ‘austerity measures’ to reduce their debt levels in the near future, almost, inevitably resulting in a recession in Europe in 2012/2013

With growth stalled in much of the developed world, attention has turned in recent months to key emerging markets, including members of the so-called BRIC countries of Brazil, Russia, India and China – the only developing economies with annual gross domestic products of over $1-trillion. The BRICs have moved from 11% of global GDP in 1990 to about 25% today and are poised for further growth. By 2050, that’s expected to be almost 40 per cent of global GDP, with China overtaking the U.S. by 2050, becoming the world’s largest economy as measured by GDP.  Nonetheless within the BRIC countries, not all are performing so well. India has been highlighted as country whose economic growth is being restricted by poor economic governance and corruption.

So should existing firms base their marketing decisions on poor market trends and economic data and should new businesses aim to produce low price, good value for money products? Possibly so; figures prepared by retail analysts in the US and Europe, where the recession is hitting the most, reveal greater demand for lower priced goods and service such as supermarket own brands. These goods are referred to as ‘counter-cyclical’ as demand increases when the economic cycle is in decline.

At present, approximately one out of every 11 store sites is empty at traditional malls in the US; the highest mall vacancy rate in over a decade, but discount chains, such as Poundland, are opening new stores when many other chains are closing branches. Outlet malls and discount shops, where both rent for businesses and prices for consumers are cheaper, appear to be flourishing in the US and Europe and attracting customers who would not have used a discount store before.

However, firms concentrating purely on the bottom end of the market may be missing a trick as averages are simply that, masking a range of consumer behaviours and unequal distribution of incomes. One of the driving forces behind demonstrations in financial centres across the developed world is the increasing gap between rich and poor. In many western countries the luxury end of the market also seems to be thriving thanks, by and large, to the insatiable appetite of the “new rich” in China for the cachet that European brands bring and the continuing desire of the super-rich for ostentatious and conspicuous consumption.

Of course, other external environment factors are changing the nature of the shopping experience. The rise of internet shopping has allowed smaller businesses to access global markets. For example, AlexandAlexa, a family owned business founded in September 2007 by a husband and wife team, currently stocks over 75 luxury and premium brands, offering fashion, shoes, toys, books and accessories for children aged 0 – 12 years. The business focuses on securing high-profile luxury and premium children’s wear brands and was set up in when the two owners found that they could not find designer labels for their children and recognised there was a gap in the market.

The business lesson is that even in the depths of a recession, there are market opportunities for firms across the spectrum of incomes and world markets. Indeed, a recession may well be the opportune time for established businesses to invest, and for new businesses to enter the market provided the right markets can be identified.

IB-style questions

1. Distinguish between a recession and depression.

2. Explain the impact on small businesses of the growth of e-commerce.

3. Analyse the impact that external opportunities and threats may have on business opportunities and strategies.

4. Discuss how businesses can differentiate themselves and their products from competitors in times of recession.