Will the Great Recession have an lasting effect on consumer attitudes?

Okay, this post is a bit nerdy and not the typical brand blogging kind of stuff.  It looks at some of the deeper economic and psychological issues involved in the on-going Great Recession.

Since the beginning of 2010 I have been asked by clients and friends, Is this downturn really going to make a permanent, generational shift in consumer attitudes?  Or will people just return to their old habits once the economy picks up more?

Are we in a state of a “new normal” where the changes are fundamental and profound?  Or is this just another swing in the on-going see-saw in response to the business cycle?

The answer to this question has serious implications for businesses.   To make a broad generalization, if a company believes the changes are temporary, then they will not make dramatic changes in their product lines going forward.  If another company believes there is a fundamental change in attitudes and behaviors — a lasting change — then they will move quickly to capitalized on that new trend.  They will align their offerings and their brand with the shift in consumer values.

The question comes up whenever there is a downturn.  Usually the answer is that people will resume their previous patterns.  Here are two examples:

Following the oil shocks and inflation of the 1970s, many people predicted that Americans would make a generational shift to smaller cars.  The price of a gallon of gas rose to $1.35 by 1981 — which is equivalent to $3.24 in today’s dollars, adjusted for inflation.  Source: Inflationdata.com, based on BLS statistics.  Fuel economy was the catch-word of the day.  Gas rationing was fresh in everyone’s minds.  [A short detour into history of the times.  During the 1970s OPEC companies put an embargo on oil to the US.  One result was that people could buy gas only every other day, depending on the last digit of their license plate being an odd or even number.]  Within a couple of years the cost of gas dropped back down.  The American love affair of minivans and then SUVs soon knocked out any serious discussion of changes in consumer attitudes and behaviors.

Inflation_adjusted_gasoline_price

On a Monday in October of 1987 I was standing at a window on the 21st floor of 1515 Broadway, watching the news ticker on the Times Square Tower.  The news was astounding — a drop of over 22% in stock prices during just one day.  My client at the time, The Prudential and Prudential-Bache was concerned that this signaled the end of people buying mutual funds and other investments closely tied to the stock market.  Was this going to be a generational shock like the crash of 1929?  We conducted market research among mutual fund and stock owners.  Rather than rushing to sell their mutual funds, most said they were going to hold and see what happened.  That was when the stock market high was 2,700.  We all know what happened next — that more and more people put more and more money into the stock market in the years that followed.

Based on past experience it is reasonable to assume that attitudes and behaviors will return to “normal”, that the disruption in purchasing behavior is just temporary.

However, this time really does appear to be different.  This time there is considerable evidence that the severity of the Great Recession is deeper and longer lasting than previous downturns in the US and Western Europe.  Go beyond the typical measures of employment and GDP and look at price inflation.  Or, rather, deflation.  In this downturn prices have actually dropped across the board for almost everything.  Down for home prices, down for commodities, down for goods and services.

In my opinion, it is price deflation, or negative inflation, that makes this downturn different from all others.  And that is why we can expect a longer lasting shift in attitudes.  A generational shift.

What is price deflation?  It is the phenomena of falling prices.  What is expensive today is cheaper tomorrow.  Sounds like a great idea, since everyone wants to pay less for what they are buying.  In practice it is far from a great idea.  It is the exact opposite of a great idea.  Price deflation is dangerous for businesses.

Here is a simple hypothetical example of how deflation works:

The price of a toaster oven is $100 this week.  In a stable price environment it will be $100 next week and so on.  You can but it today or tomorrow and it will make no real difference.

In a slightly inflationary environment it may rise to $102 within a year.  That gives you an incentive to purchase the toaster oven today so that the price doesn’t rise tomorrow.

But in a deflationary cycle the cost will drop from $100 down to $90 (hypothetically speaking).  Therefore you will not buy today or tomorrow.  You will wait for prices to fall further before you buy.  Your demand for the product has now declined.  Why buy a toaster oven today when it will be cheaper in a few months?

This sets a trap for marketing.  Advertising price drops should, in a normal economy, stimulate demand.  So many companies will continue with the price promotions from the recent past.  In a deflationary period it simply reinforces the belief that prices will decline, so consumers will continue to wait before purchasing.

Pushing hard on pricing also de-values a brand.  So now you have a price deflator attached to your brand.

In a deflationary time, marketing has to work harder than ever to stimulate and support consumer demand.  It needs to stimulate desires that counter the consumer psychology of deflation.  Easier said than done, however.

So how real is the threat of deflation?  Very real.  Below is a chart on inflation rates.  Real price deflation has already happened.  And we are on the verge of a long term slide into more deflation or, at best, virtually no inflation.  This is not just an academic exercise or something for politicians and Paul Krugman to argue about.  It has a real effect on stock prices, on the ability of people to buy goods, on income levels on the overall demand for goods and services.

inflation rates

So, yes, this time there is good reason to believe that changes in consumer attitudes are real and lasting.

Gone fishin’

Heading out of town for a little snorkling and relaxation in the Bermuda Triangle.  So the posts will be rather sporadic and may include some fish tales and shaggy dog stories.

And while I’m swimming around, I’m going to be wondering what really happened at HP.  There is a lot of Hurd said/Board said in the NY Times and the WSJ.  Interesting to note that Hurd is on the board of directors of WSJ’s parent company.  Can’t help but feel like there is something else going on that we haven’t heard about…yet…

The plunge in HP’s stock price also raises some very interesting questions about the brand valuation models currently used by companies such as Interbrand and Brand Finance.  If the CEO’s “resignation” can trigger a $12 billion drop in value, then is he part of the brand valuation?  What is the common percentage of a brand’s value can be apportioned to the senior executives?

Just something to consider while lying on the beach not reading the book that I’ve been carrying around with me  since Father’s Day.  It’s a series of non-fiction essays about a New Jersey woman of Turkish descent who loves Russian literature.  A most peculiar mixture!

Is it a Value brand or just Cheap?

There’s a wonderful phrase in economics called the “Utility Curve”.  It’s how economists explain why you’ll pay extra to buy a diet coke at the corner deli when you could save fifty cents by walking two blocks to the Gristede’s supermarket.  The marginal utility of not walking 2 blocks is equal to the marginal utility of the closer soda.  Or some such mumbo-jumbo. 

Basically it’s a fancy term for making our irrational choices fit neatly into economic formulas.  One of my professors called it the Finagle Factor — the way to wiggle around the stuff you can’t figure out.

Well, those utility curves are on the march, in many cases downwards.  Our Utility is walking a bit further to save money.  We all want to be seen spending our dollars wisely.  And if you look at advertising, suddenly the word “Value” is cropping up everywhere.  Value brands.  Value stores.  Value segments.

I think we are all fooling ourselves into thinking value is somehow calculated in people’s minds with an equation related to quality and price.  Value means cheap. So why not just say it straight?  Cheap brands.  Cheap stores. Cheap segments In these days, being cheap is a good thing.  

The word cheap used to have a much more positive connotation.  It meant getting a great bargain.  It was a sign of being clever. There was even a best selling book called Cheaper By The Dozen back in the late 40s.  

I get the feeling that the people who are really most comfortable using phrases like “Value Brands” are the advertising agency folks.  Working on a “Cheap Brand” just doesn’t have the portfolio cachet of “Luxury Brands”.  Which would you rather have on your resume — Bergdorf’s or Walmart?

On the other hand, the vast majority of people in this country really just want to know the cheapest place they can buy what they need.  Because the Utility of convenience doesn’t mean much when your job has evaporated and you have all the time in the world.

The Utility Curve has shifted.  Now it’s time to shift the language.  Cheap is in.  Cheap is cool. Cheap is smart. We are entering the era of Cheap Chic! Just ask MTV.

Brand Valuation and the Stock Market

A couple of days ago I was making some observations about the way brand valuations seem to be disconnected from the values of companies.

In response we received a comment from a member of Interbrand saying,

Firstly, let’s be clear that there is no link to stock market prices and brand valuation. As you know, stock markets set a price on a company based on investors’ perceptions of whether share price will go up or down. 

However Interbrand does make an argument that there is a connection between the valuation of a brand and the stock price based on their own study with JP Morgan.

Several studies have tried to estimate the contribution that brands make to shareholder value. A study by Interbrand in association with JP Morgan (see Table 2.1) concluded that on average brands account for more than one-third of shareholder value. The study reveals that brands create significant value either as consumer or corporate brands or as a combination of both.

Table 2.1 shows how big the economic contribution made by brands to companies can be. The McDonald’s brand accounts for more than 70 percent of shareholder value. The Coca-Cola brand alone accounts for 51 percent of the stock market value of the Coca-Cola Company. This is despite the fact that the company owns a large portfolio of other drinks brands such as Sprite and Fanta.

 

 

 

 

This is an interesting connundrum.  

If there is no connection between stock prices and brand valuation, then the Interbrand/JP Morgan study is wrong.  But if there is a connection, then there is a tremendous disconnect between the valuations put on brands by Interbrand and others and the market valuations of the companies.  

I do not mean to single out Interbrand.  Brand Finance and others have similar measures. It is just that Interbrand is the most public in their efforts with BusinessWeek.

It is well established by this time that brands have value (sometimes a negative value!).  No disagreement there.  So how does a company place a value on that?  It has been and will continue to be debated for quite some time.  The brand valuation method of Interbrand is among the best in the market.  Even so — there is a commonsense logic that the brand valuations published in BusinessWeek are highly inflated.  

The relative values of one brand to another probably hold true.  But the actual numbers?  Unlikely. Is the Cit brand really worth $20 billion?

Can a brand be valued by the stock price?

Back in the dark ages of 1987 I was working at an ad agency where my clients were The Prudential and its stockbrokerage, Prudential Bache.  Our offices were on the 20th floor of 1515 Broadway, overlooking Times Square itself.  It was a glorious view from there, particularly at night.  The military recruiting station was still there.  The seedy parts of the neighborhood were still in ascendance. While we didn’t have the internet we had something even better — the news ticker on the side of the One Times Square.

One day my boss called me over the windows looking out on the square.  On the news ticker was the announcement of the stock market crashing, dropping hundreds of points.  By the end of trading the market was down about 508 points — over 22%.  It was stunning.

When we could pull ourselves away from the windows, we turned to the business of setting up a market research study for our clients to assess the impact of this drop on willingness for people to buy stocks, mutual funds and universal life insurance. Back then, a relatively small percentage of people actually owned stocks or even mutual funds.

The agency quickly rushed out new Prudential Bache advertising to reassure investors with the tagline, “Rock solid.  Market wise.”

No one was particularly thinking that the stock market collapse would have any bearing on the strength, equity and value of brands in general.  What did the stock market have to do with brand valuation?

Flash forward to 2008 when the stock market tanks.  By this time there are well established measures and indexes of brand value tied directly to stock values.  For more than a decade brand consulting companies such as Interbrand have been selling brand valuation studies showing how many billions of dollars this or that brand is worth.  This listing is published every year in a the top global brands in Business Week.

In this past 2008 ranking Citi was valued at $20 billion.  The stock market valuation of Citi today is about $14 billion.

Does that mean if you took the Citi brand away that the rest of the company is worth negative $6 billion?  

Or that the Citi brand itself is now worth a negative $6 billion?  In other words, the bank would be better off without the Citi name attached to it.  Certainly in Wednesday’s testimony the head of AIG indicated that they would be better off without their brand.  At Citi the recent advertising campaign of “Live Richly” have contributed to making the company a target.  And the same is true for Bank of America’s “Bank of Opportunity” campaign.

The standard approach to marketing, the Brand Positioning approach, would say that you cannot change the minds of people about these brands.  You need to change the brands since you cannot change minds.

So we now see two standard marketing tools failing companies today.  Brand valuation is setting up the wrong benchmark.  And Brand Positioning is directing companies to dump their brands instead of changing their marketing approach.

Rather than changing the brands, it would be more effective for the banks to change their approach to marketing.  If they reinvent marketing so that it is better integrate and aligned with the rest of the organization, then they would begin to see a change in how people perceive them.  It would not solve the underlying financial problems.  But it would go a long way to creating public sympathy instead of the current anger.