Consumer response to crisis: a time-series analysis of purchases and use of promotions for beer product category.

Author:Descals, Alejandro Molla
  1. Introduction

    In recent years, consumers in most Western economies have experienced or are experiencing significant losses in their purchasing power that result in dramatic declines in consumer confidence indices (European Commission, 2012, The Conference Board, 2012). Given the importance of their consequences, several studies have focused on analyzing the effect of economic recession on consumer behavior (e.g. Granfield, 2009; Simon, 2009; Faganel, 2011). In this line, it has been observed that the economic crisis has a negative impact on sales of luxury products, while it does not affect the basic necessities, such as food products and personal care (Sharma, 2011). In this way, the consumer purchasing behavior during the crisis depends largely on the product category considered. In general, the purchase of luxury goods is postponed, prioritizing the continuity of buying necessity goods.

    A communication tool commonly used to encourage purchases is sales promotions. Retailers can find in sales promotions an instrument to encourage consumption in times of crisis. However, while there is a broad consensus on the higher sensitivity to price of consumers in economies in recession (Chou and Chen, 2004), there is still little evidence about the influence of the crisis on consumer response to promotions (Bratina, 2011). Therefore, the objective of this paper is to analyze consumer behavior regarding promotions as the process of economic recession deepens, using scanner data. For this purpose, a product category has been chosen that, although included among food products, can not be considered as a necessity good, and therefore one could do without it. In this way, we try to identify changes in consumption patterns in times of crisis, in order to lay the foundation for a deeper analysis in which other product categories with different characteristics may be included.

  2. Literature review

    2.1. Effects of economic crisis on consumption

    Changes in consumer purchasing behavior during periods of economic downturn have been a topic of study for several researchers (e.g. Faganel, 2011, Simon, 2009). One of the most comprehensive studies is the one of Granfield (2009), who identifies ten different effects that crisis may cause on consumption patterns, namely:

    * The Aldi effect--the consumer looks for the same products at a lower price in other stores, without avoiding its purchase;

    * The Lipstick effect--buying low value items instead of luxury goods as a fad;

    * The Armchair effect--consumers spend more time at home and consider it as their new entertainment center, trying to provide it with all the amenities;

    * The Rain-check effect--high value purchase decisions, or high risk decisions, are put on hold, since it is aimed to postpone any non-essential expenditure to a future moment at which the economic situation is more stable.

    * The Mr. Burns effect--under the name of the character of miserly businessman in "The Simpsons" animated sitcom, the author refers to the reduction of donations and charitable works of consumers in times of economic crisis;

    * The Herd effect--even those consumers that enjoy financial stability modify their consumption behavior, influenced by the behavior and panic of those around them;

    * The "Do it yourself" effect--consumers start to opt for doing things by themselves rather than hiring professionels, thus reducing expenditure on non-essential services;

    * The Real Money effect--consumers avoid taking new loans voluntarily because of fear about committing themselves to a future debt;

    * The Optimism effect--consumers will turn their attention to companies or brands with fun or light-hearted personalities that relieve them in these sad times;

    * The Calvin effect--hedonic spending will slow in favor of more conservative consumption patterns.

    Flatters and Willmott (2009) corroborate some of these features indicating some trends emerged and stimulated by the recession in the markets, emphasizing frugality, trend to simplicity, lower consumer loyalty and, indirectly, greater relevance of price reflected in trends toward reduction in responsible drinking behaviors (i.e. ethic or fair trade) or ecological consumption, usually associated with more expensive products.

    In contrast to changes in consumption patterns, Favaro et al. (2009) point out five rules that should be followed by retailers in difficult economic times. First, focusing on customers who are not loyal either to the store or to competitors' stores. Second, reducing the gap between consumers' needs and what is offered by the establishment. Third, reducing "bad costs", that is, those that produce benefits for which consumers are not willing to pay. In this sense, Simon (2009) also advocates to communicate more visible and tangible benefits for consumers. Fourth, grouping stores according to the similarities and differences of the needs of local consumers and their buying behavior. Finally, redesigning processes--market research, inventory planning, performance management, strategic planning, etc.--to improve the positioning of the company, and even redefine business models (Simon, 2009).

    An economy in recession may encourage companies that have abundant resources to cut prices aggressively to maintain their dominant position in the market, so that this may force businesses with fewer resources to react strategically entering in the price war (Sharma, 2011). However, even for companies with healthy finances, predatory pricing policies may not be the solution in the context of an economy in recession (Sharma, 2011).

    Sales promotions

    The use of sales promotions is common for both manufacturers and retailers to boost sales of their products. To this end, different types of incentives, usually on a short-term basis, have been raised in order to increase or anticipate sales of a product. Thus, for example, temporary price reductions, extra product for the usual price, discount for multiple purchase (e.g. 3x2), lots, manufacturer direct gift, special exhibition or product advertising at point of sale, and the insertion of the product in the retailer's brochure are frequently used (Molla et al., 2011).

    From the point of view of the manufacturer, with the emergence and dramatic development of private labels, promotions have been raised as a response of manufacturer's brands to low prices and value propositions offered by store brands. Sales promotions have for consumers an incentive value to test the product, which manufacturers hope will be translated into subsequent customer loyalty.

    For retailers, the use of promotions is explained not only by the increase in sales in the promoted category, but also by traffic attraction to the store. However, the ultimate consequences of these promotional policies may also include...

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