Seven Myths of the Downturn The great enemy of the truth is very often not the lie, de- liberate, contrived, and dishonest, but the myth, persis- tent, persuasive, and unrealistic. — John F. Kennedy I n hard times, people like to talk about how much harder life could get—in part to prepare themselves for the worst. That’s all well and good, but if executives allow their worst fears about the recession—rather than a factual assessment of their company’s markets and consumers—to determine their decisions, they are likely to miss opportuni- ties and lose their competitive acuity. As leaders, we need to see through the myths of the down- turn and focus on the reality. This is especially critical as we navigate our course through the recession and into the new normal. In the discussion that follows, we examine seven of the most prevalent myths about the recession and the new order that will follow. We subject those myths to a reality check, draw- ing on our experience with clients over the past year and pro- prietary data from our annual Consumer Sentiment Survey of more than 20,000 consumers around the world, which has been conducted frequently over the past two years. Myth 1: This Is the End of Consumption This prediction is ubiquitous in the media and, unfortunate- ly, in executive offices as well. According to the myth, the glo- ry days of mass-market consumption—when marketing cam- paigns reached 90 percent of target audiences in just three exposures and consumers lined up to buy brands at any price—are a thing of the past. But whether those times ever existed is debatable. Certainly, markets are increasingly frag- mented today, and consumer anxiety about the economy is very high. Where home values have dropped sharply, con- sumers are indeed saving more and spending less. Yet shop- ping (also known as “retail therapy”) has always been, and continues to be, an emotionally fulfilling experience for many consumers. For instance, last February—during the darkest days of the recession—51 percent of U.S. consumers OPPORTUNITIES for ACTION CONSUMER If executives allow their worst fears ■ about the recession—rather than a factual assessment of their company’s markets—to determine their decisions, they are likely to miss opportunities. Consumer confidence is indeed at ■ an all-time low, but spending patterns differ significantly across product cat- egories, segments, and channels. Therefore, it is critical to de-average the recession’s effect on your markets and categories. Much of what the media interpret ■ as a global trend toward frugality is ac- tually a recession-driven manifestation of a more encompassing sustainability megatrend, reflecting a shift toward an environmentally conscious, less showy lifestyle. Strategy matters now more than ■ ever. This is the time to define your ad- vantage rather than just defend your turf. It’s the time to capitalize on mar- ket turmoil and win share while com- petitors are stumbling.
Transcript
Seven Myths of the Downturn
The great enemy of the truth is very often not the lie, de-liberate, contrived, and dishonest, but the myth, persis-tent, persuasive, and unrealistic.
— John F. Kennedy
I n hard times, people like to talk about how much harder life could get—in part to prepare themselves for the worst. That’s all well and good, but if executives allow
their worst fears about the recession—rather than a factual assessment of their company’s markets and consumers—to determine their decisions, they are likely to miss opportuni-ties and lose their competitive acuity.
As leaders, we need to see through the myths of the down-turn and focus on the reality. This is especially critical as we navigate our course through the recession and into the new normal.
In the discussion that follows, we examine seven of the most prevalent myths about the recession and the new order that will follow. We subject those myths to a reality check, draw-ing on our experience with clients over the past year and pro-prietary data from our annual Consumer Sentiment Survey of more than 20,000 consumers around the world, which has been conducted frequently over the past two years.
Myth 1: This Is the End of Consumption
This prediction is ubiquitous in the media and, unfortunate-ly, in executive offices as well. According to the myth, the glo-ry days of mass-market consumption—when marketing cam-paigns reached 90 percent of target audiences in just three exposures and consumers lined up to buy brands at any price—are a thing of the past. But whether those times ever existed is debatable. Certainly, markets are increasingly frag-mented today, and consumer anxiety about the economy is very high. Where home values have dropped sharply, con-sumers are indeed saving more and spending less. Yet shop-ping (also known as “retail therapy”) has always been, and continues to be, an emotionally fulfilling experience for many consumers. For instance, last February—during the darkest days of the recession—51 percent of U.S. consumers
OppOrtunitiesfor ActiOn
Consumer
If executives allow their worst fears ■about the recession—rather than a factual assessment of their company’s markets—to determine their decisions, they are likely to miss opportunities.
Consumer confidence is indeed at ■an all-time low, but spending patterns differ significantly across product cat-egories, segments, and channels. Therefore, it is critical to de-average the recession’s effect on your markets and categories.
Much of what the media interpret ■as a global trend toward frugality is ac-tually a recession-driven manifestation of a more encompassing sustainability megatrend, reflecting a shift toward an environmentally conscious, less showy lifestyle.
Strategy matters now more than ■ever. This is the time to define your ad-vantage rather than just defend your turf. It’s the time to capitalize on mar-ket turmoil and win share while com-petitors are stumbling.
Seven Myths of the Downturn 2
and 45 percent of European consumers in our survey said that they still feel good about spending.
More important, companies should realize that even at the lowest point of a downturn, consumer spending var-ies considerably by region and consumer segment, which leaves many niches for growth open. In many countries, the economic impact of the downturn has been mitigat-ed by public policies or by a country’s limited exposure to the mortgage crisis. In France and Germany, for ex-ample, consumer demand has remained at reasonable levels, despite extensive coverage of the recession in the media.
This is not the end of consumption, only the end of uncon-strained spending.
Myth 2: There Is No Escape from the DownturnConsumer confidence is indeed at an all-time low, and the economic crisis is global in scope. But the down-turn’s impact on spending patterns varies significantly across products, segments, and even channels. For in-stance, although retailers in many markets are suffer-ing, discounters everywhere are doing relatively better. Therefore, it is critical to de-average the recession’s ef-fect on your markets and categories. In our research, we also discovered that despite the downturn, consumers were much less willing to cut spending for selected prod-ucts or brands that they feel an emotional connection with or consider too important to scrimp on. Many con-sumers are cocooning rather than going out, for exam-ple—focusing their spending on products related to im-proving their families’ well-being, such as healthy food, family vacations, and education-related products.
How consumers cope with tight budgets also varies de-pending on the channel and product category. In a large category such as cosmetics, 41 percent of U.S. survey participants said that they would cut back by purchas-ing less often, rather than by trading down to a different brand. When it comes to dry and canned food, however, many said that they would economize by seeking out promotions or switching to less expensive products.
Moreover, in many large emerging markets, we found that the appetite for branded packaged goods is show-ing considerable resilience in this cycle, as well as strong potential for growth in some categories.
Although the crisis is global, there are many hidden opportu-nities waiting to be tapped if you look beneath the surface.
Myth 3: Brands Are DeadTo be sure, trading down for discount and value brands is gaining ground across many consumer-goods catego-ries. Retailers are increasingly positioning themselves as defenders of budget-constrained families and giving their private-label products more shelf space. And un-doubtedly, many retailers are becoming much more so-phisticated branders, as their own retail brands earn in-creasing credibility with consumers.
Nevertheless, the crisis is an ideal opportunity for trust-ed brands to reinforce their core strengths with mean-ingful innovation and quality assurance in order to pro-vide a safe haven for uncertain consumers. A revitalized marketing mix—including so-called altruistic market-ing programs that recognize consumers’ budget con-straints—will give consumers good reasons for bypass-ing cheaper alternatives. In particular, large global brands, which consumers trust, continue to appeal to the aspirations of mass-market consumers in emerging economies. For instance, more than 70 percent of Chi-nese and Indian survey participants said that they would trade up to branded products for their technical superiority and trustworthiness. Focusing on those mar-kets is a good way to rebalance global companies’ port-folios for growth.
Brands are far from dead—and the best ones will use the crisis to come out of the cycle stronger and more relevant than ever.
Myth 4: Frugality Rules—Trading Up Is OverConsumers are tightening their purse strings—they do so in every recession. But in this downturn, the media have dubbed frugality “the new chic,” as consumers re-ject ostentatious luxury and embrace craftsmanship, traditional values, and wholesome products. However, our data indicate that much of what the media interpret as a global trend toward frugality is actually a reces-sion-driven manifestation of a more encompassing sus-tainability megatrend. It reflects a shift toward an envi-ronmentally conscious, less showy lifestyle, which incorporates energy-saving products, local produce, and healthy foods. By recognizing megatrends, companies can discover the true drivers of consumer behavior and invent the products and services that will fulfill these emerging needs.
Another indication that frugality isn’t as pervasive as people think is that consumers in emerging markets, as we noted above, are interested in quality and willing to
Seven Myths of the Downturn 3
pay more for better products and strong brands that they can trust. Indeed, the next billion consumers in Bra-zil, China, and India represent a promising new market that packaged-goods players could learn to serve better. And even in the developed world, middle-income con-sumers have told us that they will make tough compro-mises—perhaps buy less often or in smaller quanti-ties—but they will continue to trade up in selected categories that are central to their lives.
Rather than a global megatrend, frugality is the “downturn face” of a long-term megatrend of thoughtful consumption aimed at better-quality products and a more balanced life-style. It is a new space of opportunity and innovation for brands.
Myth 5: It’s All About Cutting Costs and Saving Cash—Innovation Can WaitStaying lean is a good precaution in times of crisis. In-deed, it is a CEO’s duty to scrutinize costs. In our inter-views with packaged-goods executives all over the world, 87 percent said that they were focusing on streamlining their portfolios, optimizing their marketing spending, and reducing overhead. But cost cutting alone cannot be the basis of competitive advantage.
Retailers may want less clutter on their shelves, but they also seek exciting new products that both drive profit-able sales and enhance categories. During the 2001 re-cession, Apple introduced the first version of the iPod, Pfizer brought out Listerine PocketPaks, and Procter & Gamble introduced the electric toothbrush as a mass-consumption item.
Growing markets certainly present an easier playing field for new products, whereas downturns increase the need to demonstrate an innovation’s true value and rel-evance. Therefore, the best innovators often do even better than usual against their competitors during re-cessions, winning valuable share and customer loyalty over the cycle. With competitors focusing only on costs, the field is open for innovative products, new shopping experiences, and the reinvention of business models.
Cutting costs is only one face of managing the downturn. Freeing up cash to invest for growth and to bolster innova-tion through the downturn is key to advancing a competi-tive position over the cycle.
Myth 6: It’s All-Out War Between Retailers and Suppliers
Not surprisingly, many retailers’ profits have plummet-ed, and they are focusing intensely on costs. Even sector leaders are feeling the heat. Only discounters seem to be faring well. A survey by The Boston Consulting Group of dozens of executives from fast-moving consumer-goods companies across the world confirmed that retail-ers are reacting by asking for even sharper price conces-sions, actively deploying multitiered own-brand strategies, and selectively but systematically reducing shelf complexity and space for branded products. Third- and fourth-tier brands will suffer the most, as retailers make room for private labels.
Bad news for lesser brands, however, could also be good news for first- and second-tier brands if they take a com-prehensive view of their categories, work constructively with their retail partners, and focus on consumers and shoppers in developing solutions. The results will en-hance the category attractiveness for consumers and in-crease demand.
Going to war is pointless. The crisis presents an excellent op-portunity and a powerful case for constructive partnerships and the creation of joint value for retailers and suppliers.
Myth 7: There Is No Time for Strategy
Many executives focus increasingly on tactical measures during a crisis and disregard the strategic core. The rea-soning, we often hear, is that strategy is too time con-suming and not as relevant as everything else on their plates.
BCG believes that strategy matters now more than ev-er—and not only because it supplies a much-needed sense of direction in a chaotic environment. This is the time to define your advantage rather than just defend your turf. It’s the time to capitalize on market turmoil and win share while competitors are stumbling. Most industries will look remarkably different two or three years from now, and many businesses will have to find new ways to compete. Companies must consider how (and how fast) they should change. Do they simply need to evolve, or do they require major transformation? The best companies develop the ability to envision their fu-ture through three lenses at once: near-term activities,
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medium-term plans, and long-term goals. They avoid letting any one perspective (especially the myopia of short-term tactical fixes) overshadow the others.
When a crisis is turning your world upside down, consider it an opportunity to reinvent competitive advantage. There is no better time for strategy than now.
Myths have their place, but not in businesses that are determined to come out on top in the recov-
ery. Here are seven questions to test your organization’s ability to tell truth from fiction:
Do you know how your customers’ and consumers’ ◊needs are changing through the downturn?
Have you de-averaged the recession’s impact on your ◊categories, markets, channels, and consumer seg-ments?
Are you focusing on your brands’ core values and ◊strengths across the whole consumer experience?
Are you giving customers good reasons to remain loyal ◊to your products in hard times? Are you showing em-pathy in tough times?
Are you sufficiently investing in differentiated innova-◊tions that will attract consumers and win sustainable competitive advantage?
Have you identified which distributors to partner with ◊to change your category’s dynamics?
Do you align short-term tactics and long-term vision ◊for strategic advantage?
A crisis can often be turned into an opportunity. This is the time to fight back against sluggish sales and lay the groundwork for a rapid advance once the economy re-covers and the new normal takes hold. The myths won’t determine the future—you will.
Patrick DucasseMarin Gjaja
Karin Zimmermann
Patrick Ducasse is a senior partner and managing director in the Paris office of The Boston Consulting Group and the global leader of the firm’s Consumer practice. Marin Gjaja is a senior partner and managing director in BCG’s Chicago office. Karin Zimmer-mann is the global manager of the Consumer practice and works in the firm’s Paris office.
