Braced for belt-tightening

It is no secret that the economy is slowing down, meaning a tightening of the belts over Christmas and into the New Year. But in an effort to keep up marketers’ spirits over the festive season, Marketing Week has spoken to some of the industry’s most senior figures about how brands can best deal with changing market conditions.
The credit squeeze that has already done for Northern Rock is making borrowing harder and forcing up mortgage repayments, while inflation in raw material prices is being passed on to consumers, especially in foodstuffs.

However, The Marketing Society president Andrew Marsden does not believe that all sectors will be affected in the same way. “In the second half of next year, I suspect that, whatever happens, there are going to be tougher economic conditions. With a resurgence of commodity prices and energy costs going up, it will be a double whammy if consumers stop a portion of their expenditure,” he says.

“But it will be different for different parts of the economy. The luxury end will prosper but premium brands will suffer, while the more resilient brands in the mass market will be OK. They tend to be recession-proof because they have stronger appeal.

“If money is plentiful and you try something and don’t like it, you just throw it away. When money gets tighter people return to buying brands they know they like.”
Marsden, a former marketing director of Britvic Soft Drinks, thinks we are entering an era of “smart marketing”. “If you can make your brand look, feel and be better for less money, that’s great,” he adds.

Meanwhile, Paul Cousins, a former Jacobs marketing director who is now a consultant at Cousins Davis, says only brands with the strongest propositions will prosper during a downturn.

Marketers must avoid the temptation to “buy one get one free their way” out of hard times, he says. “The biggest brands are the ones that promote through a recession,” adds Cousins. “But I have a horrible feeling that many non-mega brands will be heavily sales promoted.”

He argues that marketers tend to take their cue from sales departments, who argue for price cutting over increases in the marketing budget.

However, another view is that there will be a decrease in discounting. The first stage of passing cost inflation onto consumers will be a steady reduction in the proportion of goods on discount. This is a precursor to increasing the price on the shelf. On this view, Bogofs and two-for-the-price-of-one offers could be the first thing to be axed in the year ahead.

Some argue that for food brands, rocketing prices may put pressure on shoppers to buy cheaper own-label goods. Tim Perkins, director at branding agency Design Bridge, believes brands from McVitie’s biscuits and Hovis bread to Heinz beans will need to restate their brand values in this new wallet-stretching era. That could mean redesigning packaging and ensuring the brand proposition is more powerful than ever.

“There’s pressure on mainstream brands which are at a price premium to own-label because own-label has caught up in terms of quality,” he says. “What the big brands really need is to have a strong point of view and sense of purpose. This will help justify their price increases.”

Perkins adds that one possible avenue to explore is relaunching the goods in lower-cost packaging. Australian wine producer Wolf Blass has led the way by putting wine in plastic bottles.

But Nick Shepherd, vice-president of global brands for Kraft Foods, says spiralling raw material prices tend to narrow the price gap between the cheapest and most expensive brands. “Raw material prices are the same for everyone so there might be a narrower gap between own-label and brands, even though absolute prices will go up.”
He attributes rising food material prices to increased demand – especially for dairy products – from China; the Australian drought and other adverse local weather conditions; and the US push into biofuels that is increasing demand for maize.

Shepherd believes brands that continue to invest in brand building through an economic downturn will come out of it better than those who do not. But he adds: “Brand value has always been the critical factor.”

Ever optimistic, a lot of marketers look on the bright side of the coming economic crunch. Anne Murphy, general manager at Birds Eye, says if consumers are hard up, this will benefit frozen foods, as they tend to create less waste.

Murphy believes the period ahead will sharpen focus on value, although she points out that there have been fierce price battles for years. “It has been fairly intense on price anyway,” she says. “I don’t think we are starting from a stable footing, it is intensely competitive and will continue to be so.”

The new marketing conditions will not be confined to influencing packaged goods. In the recession of the early 1990s, people tended to cut out big-ticket purchases and trade up on low-cost goods. So they might defer second holidays, expensive meals out or new cars, but they may buy more expensive food and drink instead.

The automotive sector is concerned about sales in 2008. A spokesman for the Society of Motor Manufacturers and Traders says: “We are looking at 2008 with a cautious eye. Although sales have been surprisingly good in the past few months, we expect them to be less robust next year.”

In the financial services sector, Gocompare.com head of marketing Nicholas Hall thinks unstable economic times will favour price comparison sites. But he says credit card companies are getting more choosey about who they offer cards to as worries grow about bad debts.

More generally, he believes there could be implications in the technology sector. “It is technology stuff people are cutting back on. There is always a lot of pressure from marketing to buy tech products, but we have seen it with the Sony Playstation 3, where prices are dropping.”

For UK marketers, this economic shift opens the doors on a new and challenging future. Many of them have never had to ply their trade through tough economic times and are too young to remember the recession of the early 1990s.

They have spent their professional careers in an era of easy credit, bounding technological leaps and plummeting prices on the high street. In the New Year, they will have to adjust to a new set of economic realities.

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