The effects of the US sub-prime crisis have already been considerable, but the ramifications for the UK could be far more dramatic. With high levels of personal debt, consumer spending habits will change and brands that hold their nerve and continue to innovate will be rewarded.
The sub-prime crisis started when US lending institutions began taking risks based on the assumption that house prices would continue rising. The news from the US has been bleak for months, with reports of foreclosures, layoffs and so on; these effects, and others, will likely be even stronger in the UK.
The level of personal debt in the UK is now estimated to be £1.4tr, which is more than the country’s gross domestic product. In contrast, the US’s household debt of $13.8tr (£7tr) is less than its GDP. A total of 4.8 million UK adults spend more than they earn each month. Another 500,000 are already having trouble meeting their debts. And economic growth is slowing; the Government lowered its 2008 forecast to 1.75-2.25%, compared to 3.1% last year. Housing foreclosures reached their highest level since 1999 and are expected to increase this year. Mortgage lenders have begun refusing new customers. And UK housing prices are falling.
We are rapidly moving from the sub-prime crisis towards a “prime crisis” which will affect many who previously felt pretty comfortable financially.
This could benefit farmers and producers of local goods as consumers do more shopping closer to home, while the slowdown is an apparent boon for board game makers as consumers curtail spending on entertainment and transportation. Last summer, Amazon reported that sales of board games had risen by more than one-third over the summer before.
But most marketers will have to be clever to compete for an ever-shrinking piece of the spending pie. Which brands will be smart enough to thrive when consumers realise how much money they don’t have anymore?The winners will likely be those who invest and innovate. A survey of the top 100 online advertisers revealed a market that was prepared not only to spend but to gamble with ideas. KitKat spent £9m on a low-calorie bar launch and Greggs is raising its ad spend from £3m to £4.5m. Other companies, such as New Look, are launching customer magazines to build brand loyalty.
“During this time of uncertainty, look for marketers to ramp up their interactive spending more than ever before, as it’s extremely accountable and the results can be immediate,” says Ann Mack, director of trendspotting at JWT.
When times are tough, communication is also more critical than ever. If companies don’t communicate at a difficult time, it leaves a vacuum which is filled by speculation.
Marian Salzman is partner and chief