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The Recessions Effect On Consumer Behaviour Commerce Essay

A recession is a negative decline in economic activity over a period of time. This is usually defined as a decline in Gross domestic product for two or more consecutive quarters. GDP is a measure of the country’s overall economic performance over a period of time. It is made up of consumption, investment, government spending, and exports minus imports. Consumer behaviour is the study that looks at all the reasons why people purchase products and where and when they purchase them.

The credit crunch first started with the USA mortgage market and the collapse of the global housing bubble. Individuals were taking out mortgages that they could never afford to pay back. It all went wrong when the house prices in the USA started to fall. This in turn caused the value of securities connected to house prices to fall. The financial institutions all over the world were damaged. This put uncertainty regarding banks ability to pay its debts. The banks panicked and there was a rapid decline in credit availability. The investors’ confidence also declined and this had an impact on global stock markets. It was argued that investors did not accurately put a price on the risk involved with mortgage-related financial products. This causing the whole finance market to fail. The recession has caused banks to tighten credit availability. This has caused massive problems to secure credit for big ticket items such as cars and holidays. [1]

The recession has had a major effect on many people’s consumer behaviour. There are many industries that have been hit by the recession. One important sector hit by the recession is the car industry and a knock on effect to companies that supply the car industry. Due to people finding it hard to secure finance they are unable to purchase new cars. So the sales of new cars have dramatically declined. An example of this is the Japanese car manufacturer Toyota. It has always been at the top of its game for many years. It has been producing exceptionally reliable cars and always at the cutting edge of technology. While in the recession the chief of Toyota Mr Katsuaki Watanabe produced the final annual figure which showed a loss of $4.4 billion. This was the companies’ first loss since 1950. This shows just how bad the car industry has been hit by the recession with many other firms in the industry achieving even bigger losses. [2]

Another area that has been hit is the trade associated with the housing market. Due to problems with getting a mortgage people are unable to purchase new houses. So the development of new properties has fallen. Many house building companies such as Redrow and Barretts actually stopped building new houses on their sites when they realised they could not sell them. So all the labour associated were now unemployed.

The Steel industry has also been hit hard. This is due to the car industry and house industry not needing the amount of steel they used to demand.

With the recession affecting the whole economy the government has tired to use monetary policy to fix our situation. The government has tried to alter the supply of money by lowering the interest rate. But in doing this it has affected other sectors of the population. It will have a massive effect on people who rely on good returns from money they have invested. An example of this is the older population using their savings to give them an income to live on. At the moment the interest rate is at 0.5% compared to 4.5% in 2006. So the return they will receive on their investment has declined. The consequence of this is that their disposable income will fall causing them to purchase less. The government has also reduced Value added tax from 17.5% to 15%. This is a monetary policy that aims to increase the purchasing of consumers in the economy. The recession has also caused the exchange rate to fall against the pound. This means that the price of imports increase and price of exports decrease. This in turn has caused the import of raw materials for manufacturing to increase for many businesses. Due to the fact that the UK does not produce a lot of goods we rely heavily on imports. These now cost more than what they did before. This means that the consumer is getting less value for their money.

The recession has had varied effects on different demographics within the economy. How people are affected depends on age, gender, occupation and location. The highest unemployed age appears to be the 18-24 category. This may be due to their lack of experience. A company would prefer to employ people who are skilled in doing their job. The older workers (45-64) will find it harder to obtain a new job if they are made unemployed. The current unemployment rate is at 7.8%. During a recession unemployment is a serious factor that affects consumer’s behaviour. Even if the individual consumer is not facing unemployment themselves they will still be affected psychologically. This is because other people around them such as family and friends may be affected. It will give them a thought that it may actually happen to them soon. It will affect their consumer confidence. With people having less consumer confidence they are more likely to save money rather than spend. So this makes the recession worse because it will reduce GDP more if consumers are not spending.

Consumer behaviour is related to consumer motivation. Motivation is a basic concept in human behaviour. There is believed to be tension that arises as a result of unfulfilled needs that we have. The needs that are unfilled will move a consumer away from homeostasis balance. The Homeostasis See-Saw shows that a consumer needs a balance between Need satisfaction and Deprivation. The balance between these two is believed to be the homeostasis state. There are four drives that take us away from this equilibrium. Biogenic drives are such things as hunger and thirst that we automatically think we need. Psychogenic drives which drive us to achieve a certain status. These will depend on social and cultural environment that a person is used to. Cognitive motives are those that stimulate people to adapt to the environment and achieve a sense of meaning in society. Affective motives are associated with the need of obtaining emotional goals and the ability to achieve a satisfying feeling state. In a recession all these motives would be affected. Peoples purchasing pattern and ability to purchase certain products would follow a different pattern. In a recession when times are hard it could be potentially difficult to reach the homeostasis balance.[3]

An impact the recession can have on consumer behaviour is the ‘Lipstick Effect’. When times are hard within an economy a consumer will stop spending money on big ticket items such as Expensive holidays or a new car. In order to achieve the feeling shopping brings consumers simply trade down to cheaper items to make them feel happy and content. The recent sales figures from cosmetic companies such as L'Oréal and Revlon show that the lipstick effect is in operation within our economy at the moment. L'Oréal showed sales growth of 5.3% in the first part of the year when the recession started. It shows that when consumer’s budgets are tightened that people just substitute larger luxury goods such as a new fur coat for small luxuries such as expensive makeup. [4]

Some consumers in the recession are choosing to drop a brand level in their weekly shop. This means that rather than purchasing the brand products such as Heinz and Kelloggs they are choosing to purchase supermarkets own brands or no frills brands. It is said to save on average 33% on your weekly shop by dropping one brand level.[10] Brand loyalty has less effect in a recession due to consumers not being able to afford to be loyal if there is a cheaper close substitute.

While in a recession there are many consumer behaviour trends that start to emerge. One example of this is “Sellsuming”. This is a trend where Consumers are very creative in selling products or services that they have to offer. With need to generate extra income consumers become inclined to sell things they don’t need or want anymore. An example of this is the use of eBay the online auction site to sell unwanted products. Some consumers may even go as far as renting out parking spaces.

Another trend is the Increase of online services and social media usage. With the unemployment rate increasing and jobs not being very secure, people spend more time looking for job advertisements on the internet. Consumers are also being sensible when they are shopping. The consumer is continuously looking for very good deals both online and offline. Consumers are looking for the best price and the best value available to them. Internet shopping has become the best channel for a consumer to achieve this with price comparison websites such as kelkoo.com and comparethemarket.com. Kelkoo is a shopping portal that compares many retailers and shows the best place to purchase a product depending on the cheapest prices found.

Another trend in a recession is skills enhancement and training. When people feel unsure about the future they believe that increasing their knowledge and skills is a good way to keep in them employable. The younger generation are also not entering the jobs market and choosing to increase their prospects for the future. Examples of this are the figures that show almost an 8% increase in applications for full-time study at universities in 2009. This is the biggest growth in eight years. The recession and rising unemployment have been blamed for this substantial increase.[6]

While the economy has been in recession there has been an increase in the number of people searching dating agencies. According to the New York Times “Online and offline matchmakers are reporting that dating interest is up, way up. Match.com, for instance, had its strongest fourth quarter in the last seven years.” There may be a few reasons for this increase. People may now have more time on their hands due to being unemployed. Also meeting a potential partner on the internet is easier and more affordable than socialising in other ways such as going to the pub.

A major trend of consumer behaviour in a recession is Escapism. Consumers are said to be spending money on products and services in order to distract themselves from the economic hardship. The entertainment industry should in theory be experiencing an increase in attendance. This would be such services as bowling and cinema. The figures show that in 2009 “cinemas are up 13% year on year. Fast & Furious tore up the record for the most lucrative opening weekend for a movie released in April 2009”.[7] But this can also be seen in related companies such as the American-based chain of DVD and video game rental company Blockbuster. Their sales have increased over the recession with people choosing to rent. This may be due to the reduction in layout cost of actually purchasing the DVD yourself. It could also be another form of entertainment for people. Another business that is doing very well in the recession due to a change of customer’s behaviour is Dominos pizza. They are benefiting from consumers trading down on their choice. A consumer who would have usually gone out for a meal now stays in and purchases a dominos pizza. [8]

Consumers in recession also tend to talk more about their purchases and experiences. “The OTO Research confirms 54% of consumers say that their primary source of information when choosing a brand is the Consumer Generated Content about the product and brand experience”. Due to people being careful with their money they want to make a good purchase that will satisfy their needs. In a recession people will be more likely to tell their family and friends about good deals. This is compared to in a boom consumers tend to boast how expensive a product they purchased was.

Consumers are also taking out more insurance policies during the recession. It appears that the desire to protect property becomes a high priority in a recession. This may be due to the fact that people are worried about replacement or repair costs if something does go wrong.[9] People are more likely to repair items if they break when the economies in recession. Such businesses as cobblers are seeing more and more people bringing in worn shoes. Before the recession consumers would of thrown them in the bin and purchased a new pair [12].

In order to try and reduce the effects of the recession the government introduced a scrappage scheme. It aims to increase the purchase of new cars. The consumer is offered a £2000 incentive if they have a car that is over 10 years old and are willing to scrap it. The government has also tried to increase the money in the economy by offering lower vat of 15%. This is not really much of an incentive unless you are purchasing big ticket items. They have also dropped interest rates down to 0.5%. This provides people with mortgages lower repayments. This gives them more disposable income which they could potentially spend in the economy.

In the recession not all companies are being affected. Some companies are actually doing better than they did before. Examples of people doing well in the recession are supermarkets, Amazon, dominos, cinemas, pawnbrokers.

The best strategy to follow in a recession is cost leadership. By keeping your costs to a minimum you can maximise profit and be competitive. The best way to get consumers to purchase your products is by giving them an irrefutable offer. During a recession companies should try to increase positive motivation in a consumer. You can do this with a good use of advertising. If a consumer has increased positive motivation they are more likely to want to purchase your products.

Overall it is important to realise that consumer behaviour and the recession are linked and have an effect on each other. But the effects will depend on the industry, products and the people it involves. Businesses need to be proactive in a recession in order to be successful. They must be able to change their strategy quickly and efficiently.

1 His journal

2 Ian Rowley (May 8th, 2009) Toyota's Loss Is Worse Than Expected, Available at http://www.businessweek.com/globalbiz/content/may2009/gb2009058_991777.htm

, [Accessed 16th December 2009].

3 book- SEE SAW

4 Larry Elliot (December 22nd 2008) Into the red: 'lipstick effect' reveals the true face of the recession,http://www.guardian.co.uk/business/2008/dec/22/recession-cosmetics-lipstick

, [Accessed 16th December 2009].

5 Yulia V Smirnova (June 16th 2009) Top 10 Emerging Consumer Behavior Trends in Recession, http://www.memesponge.com/2009/06/top-10-emerging-consumer-behavior-trends-in-recession/, [Accessed 21st December 2009].

6 Nicola Woolcock (February 16th 2009) University applications rise by 8% as recession bites,http://www.timesonline.co.uk/tol/news/uk/education/article5741496.ece,

[Accessed 21st December 2009].

7 Alain Portmann (April 16th 2009) Consumer Behavior During the Recession, http://webliquidgroup.com/knowledge/consumer-behaviour-during-the-recession-four-key-consumer-trends/, [Accessed 29th December 2009].

8 Chris Moore (17 February 2009) Recession hots it up for Domino's Pizza, http://www.thisismoney.co.uk/markets/article.html?in_article_id=476450HYPERLINK "http://www.thisismoney.co.uk/markets/article.html?in_article_id=476450&in_page_id=3"&HYPERLINK "http://www.thisismoney.co.uk/markets/article.html?in_article_id=476450&in_page_id=3"in_page_id=3, [Accessed 29th December 2009].

9 Nick Elliman (September 1 2009) Consumer behaviour in the recession, http://www.allbusiness.com/marketing-advertising/marketing-advertising-measures/13183075-1.html, [Accessed 29th December 2009].

10 Martin Lewis (January 2 2010) Supermarket Shopping Downshift & more, halve weekly bills, http://www.moneysavingexpert.com/shopping/cheap-supermarket-shopping,

[Accessed 2nd January 2010].

11 CBI (June 2009) Employment trends 2009 – Work patterns in the recession,http://www.cbi.org.uk/ndbs/press.nsf/38e2a44440c22db6802567300067301b/56ebefb25149a68b802575da00308471/$FILE/CBI%20-%20Harvey%20Nash.%20Work%20Patterns%20in%20the%20Recession.%20June%202009.pdf, [Accessed 2nd January 2010].

12 Sunday Times (November 23, 2008) Riding the recession: how some businesses are doing well in the downturn, http://business.timesonline.co.uk/tol/business/industry_sectors/article5213280.ece, [Accessed 2nd January 2010].

13 Charlie Makin (December 23, 2009) 10 key pointers of consumer behaviour in a recession revealed http://www.themarketingblog.co.uk/e_article001261803.cfm?x=b11,0,w ,

[Accessed 2nd January 2010].

14 Philip Atkinson (2009) Customers & Consumer Behaviour in 2009 http://www.philipatkinson.com/change-customer-consumer-behaviour-millennial.htm, [Accessed 2nd January 2010].

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