Out of the Box

Eye on the Recession: Are Consumers Taking Back What They Gave Up?

By Menachem Lubinsky on March 15 2010

It is commonly accepted that the first to suffer when a recession hits is luxury items. The housing market which fueled the economy in the ‘90’s was amongst the first to be hit. It took with it a slew of other industries, including construction, finance, and real estate. The automobile industry was next and then came fashion, furniture, travel, and even food. Consumption of red meat, for example, fell by about 3%, some of it due to health concerns, but much of it directly related to the recession.

I recently read about a middle-class family of five with a gross income of $88,000. While the husband had a job as a deputy foreman in a paper manufacturing plant, his wife held a part-time job as a registrar in a local college. Both husband and wife learned early on that there would be no raises this year and a bonus of $3500 that the husband received in 2008 would not be forthcoming. They had planned to purchase a mini-van to replace their gas guzzling large American car and they were long overdue for a paint job. When the recession hit, they scrapped both plans.

Some economists speculated that consumers spent about 20% less in a recession than they do during the good times, mostly on luxury items. The cumulative effect on the economy is, of course, what makes a recession so devastating. It obviously takes its toll on retail and rising unemployment. Many of them subscribe to the “domino theory” of where one industry after the next is affected.

Many industries seemed to be well prepared to deal with the loss of business. Airlines cut back on flights, offering travelers fewer seats while raising prices on some premium seats like business class. Hotels shut down restaurants, closed floors and even cut back on newspaper delivery. Retailers resorted to their usual mix of promotions and discounts.

Looking back, there is no questions that those that were proactive and introduced some cost-saving measures as well as special incentives to consumers were able to mitigate the change in consumer habits. On the other hands, those that took a wait-and-see attitude in the hopes that it would be a short recession suffered the consequences.

Washington’s attempt to stimulate the economy through the Stimulus Package and the Cash for Clunkers program had an immediate effect in many areas, but as it now turns out short-lived. The economists who carefully monitored these developments as the recession progressed are now backtracking to see signs of revival.

The US Commerce Department said that the retail and food services sales tally for February rose to $355.5 billion, up 0.3% from January and 3.9% from February 2009. Retail sales are watched closely by economists, as the sector makes up 70 percent of the nation’s gross domestic product. They were particularly noteworthy because of the horrendous weather that much of the country had endured this winter.
Overall, sector by sector improvements were noted, with the exception of automobile sales which dropped 2.0 percent in February, as sales of vehicles fell to 100,027, an 8.7 percent drop. Gas stations saw sales jump 0.3 percent on higher prices in the month. Restaurants showed a 0.9 percent sales jump, food and beverage stores showed a 1.3 percent improvement, clothing stores up 0.6 percent, general merchandise was up 1.0 percent, sporting goods, book and music stores rose 1.2 percent, home improvement stores were up 0.5 percent and furniture retailers increased sales by 0.7 percent.... Passenger revenue for domestic and international flights rose 1.4 percent in January from the same period in 2009, the Air Transport Association said. The ATA—which represents the largest U.S. airlines—reported airline cargo traffic was up 17 percent in December from the same period in 2008.

So is the recession over? When you look at these figures, you can definitely see an upward trend. Perhaps the biggest gain will be in consumer confidence that things are indeed improving. It may very well be that our family that had contemplated a paint job and a new car may be ready to take on at least one of these.

In addition to renewed consumer confidence, say economists. There has been a shake-out of sorts in almost every sector. For example, a fewer number of restaurants can conceivably recover some of the lost business from restaurants that have been closed. Airlines with fewer flights may be able to fill more seats at higher prices. The American Automobile Association is predicting an increased in travel this summer, but that may be to fewer hotel rooms. “Recessions in some way,” said one economist, “act like a filter that allows better run-businesses to surface to the top.” The evidence is that he is absolutely right, but it may be a bit premature to declare the end of the recession.

What is becoming abundantly clear these days is that many consumers are preparing to take back what they gave up, and that is very good news.

Out of the Box is a collection of strategic marketing articles that Lubicom has published on various topics, trends and ideas in the marketing world. The articles have been published in the Hamodia weekly newspaper circulated on three continents to a readership of well over 100,000.

The name, "Out of the Box" is a term used frequently in business nowadays to describe creative thinking that is not the norm. It is meant to help a business pull away from the pack or separate oneself from the competition. It is to some extent fraught with risk, simply because it is not the run of the mill thinking, but it is at the same time the key to reaching the next opportunity.