Many savvy observers are convinced that this recession will not just be a temporary pause in a generally upward economic trend but will represent a “reset“, a point from which the US economy is going to operate differently moving forward. The probable long term contraction of consumer spending will have some important consequences for marketers, mainly: international marketing and exporting are going to become key components of the recovery with business investment as a corollary.
First, one fact has been obvious for a while: Consumer spending is too high and must/will/is heading down. Some 70% of US GDP is represented by consumer spending. This in and of itself would not be a problem if it was not fueled so much by rising debt, and the current level of household debt is unsustainable. Extended uncertainty about the employment picture will continue to depress consumer demand. This virtually guarantees that the economy, which is so dependent on consumer spending, will recover at a very slow pace.
What does this mean in terms of marketing strategy?
Job losses in recessions since WWII
The first obvious consequence is that much of the retail business and the consumer goods manufacturing that is still based in the US will be severely affected.
A 5-point drop in consumer spending would be severe; a 10-point drop would be transformational. Strip malls full of small specialty shops started by new entrepreneurs seeking to be their own boss will be hit hard by the contraction in consumer spending.
Look forward to a glut of retail commercial real estate i.e. a lot of empty windows at your neighborhood strip malls. The revenue numbers for retail stores and chains, big and small, will continue to reflect the new reality long after the recession is officially over. This will probably sound the toll on the strategy to build a new Home Depot or Target every few miles. This is probably good news for the environment that will stop seeing farmland and wilderness paved over by urban sprawl. It also means that there will be a lot of inexpensive real estate available for the Next Wave – more on that later.
- Psychologically, this will be tough on the part of the nation that defines itself as “shoppers”, but realistically, that trend had run its course. A rediscovered sense of thrift is setting in that will result in: purchasing less frequently and focusing on quality (more like Europe), making purchases last longer with repairs, and doing things by oneself.
- Home improvement chains are seeing a surge of homeowners interested in growing backyard vegetable patches in an ironic twist that is not lost on those who remember that the disaster that was Soviet agriculture was offset by the produce grown in small private backyards.
- Those who are not affected by job loss, or who have the reserves to hold on to their homes will space out purchases of big ticket items such as furniture and cars, and in general make the home the center of attention. Those who cannot sustain the financial burden of home ownership because of unemployment or loss of income will return to renting in a reversal of a decades-long trend.
There are far-reaching consequences to this trend for the strategy of B-to-C companies:
- Respected consumer and entertainment brands can expect to do well if they focus on value for money: that is what the average consumer will be looking for. Price points may not necessarily go down, but purchase frequency will, which means that getting innovative about delivering more perceived value is what will maintain Customer Lifetime Value;
- Recognized no-frills brands should benefit from a downward shift in spending habits. Many consumers will resent the loss of status that comes from shopping at lower level retail outlets and buying lower-level brands. This aspect must be carefully managed to capitalize on the adjusted buying patterns of these erstwhile free-spending consumers;
- Second and third tier brands are in for a struggle: the budget available for experimenting with unknown extras will be much more limited;
- New brands will have an uphill battle to establish a name in this climate but some may be able to capitalize on the new mood with well targeted value propositions.
Second, a nation of consumers will (maybe) become more like the rest of the world: a nation of savers.
Households are now saving at a rate not seen in 15 years (5% and rising) not just for the sake of saving but mostly to build reserves to avoid home foreclosure in anticipation of further job losses. In the short term, this will slow economic recovery, but in the medium term, it means that there will be more money available for investment in new ventures, that is, after savings have been used to reduce outstanding debt…
The combination of a higher savings rate, the lower spending that is its corollary and a weaker dollar spells trouble for overseas export-oriented economies that have counted on the American consumer for their economic growth and development. This chiefly concerns China and other export-oriented Asian “tigers”, and to a lesser extent Japan. It will adversely affect the volume of international trade in the short and medium term which will harm many developing nations that count on exports of raw materials and low-cost consumer goods to generate much needed foreign currency.
- The truth is that while China and other countries blame the US for the economic and financial crisis, and express worries about the future value of their dollar-denominated assets, they conveniently forget that they would have achieved very little economic growth without America’s willingness to spend.
- Their trade surplus is not just caused by the American consumer’s self-indulgence, it is compounded by their conscious strategy to encourage investment in export-oriented businesses through savings at the expense domestic consumption. That will come to haunt them now as their own consumer spending component of GDP will be insufficient to compensate for the pullback of US demand that had kept so many Chinese manufacturing facilities running at full capacity. Already, many new factories are being mothballed in China without ever having started production.
Here are the most important implications for the strategy of US companies:
The consumer will clearly not be leading the recovery. What will have to drive economic activity in the future is business investment, and a good part of that investment will have to be in export-oriented ventures.
Much of the corporate drive of the last two decades which presided over the outsourcing of consumer goods manufacturing and their domestic distribution will have to redirect itself towards the opportunities of the New Normal. They will represent the New Wave that will mobilize managerial expertise and harness technology to build the companies that create crucial value for other companies – and much less for consumers. These companies will take advantage of the longstanding strengths of the US business environment (relative lack of red tape, venture capital, labor flexibility, innovation capacity…) to launch highly competitive offerings that will help countries like China and India drive efficiencies and quality in their economies. In other words, the US will have to become a lot more like Germany, which generates trade surpluses with exports of high-grade machinery and industrial equipment, but with a different product mix. Key US exports will have a strong information technology and/or Internet component with an emphasis on high-quality services that allow companies across many industries to profitably serve large numbers of customers in big countries such as India and China. Additional household savings in the US should become available just in time to invest in these companies.
International Marketing will be more important than ever and a key to long term GDP growth. Fortunately, the US labor pool includes millions of immigrants who can serve as effective bridges to foreign markets. Combined with cutting edge innovations in new technologies such as: bio-tech, nano-tech, new fuels, agro-tech, info-tech, more US companies can become very competitive in international markets. Some big firms are leading the way: the likes of Google and Cisco have carved out large positions in China for example (that’s how the Chinese government has acquired extensive Internet “control” capabilities…). Many mid-size, innovative firms now need to look abroad for growth opportunities, now more than ever.
The responsibility for this New Wave will fall on the shoulders of US entrepreneurs and business leaders. Many are still hunkering down, waiting for the wind to turn. But when the wind does turn, its domestic component will only be moderate. To drive the next wave of growth, entrepreneurs must hatch new offerings and new business models that are tailored for these times. Never let a crisis go to waste!