Advertising in a Retail Recession

Key Findings:

• Statistics Canada’s January report states that retail sales increased by 1.4%, but are expected to drop by 0.6% in February as consumers react to lingering higher prices.

• As in previous recessions, marketing spend during fiscal uncertainty can result in a stronger share of voice (SOV), helping companies recover faster when the economy rebounds.

• Focusing on brand building is a long game - but pays off.

• Consumers are changing their shopping habits and looking for better value, from following “dupe culture” and “de-fluencers”, to completely cutting out spending.

• Ads featuring solidarity in adversity and transparency - especially when prices are high - tend to perform better.

Recommendations:

• Aim to maintain your SOV above your SOM throughout the recession; it pays off long term.

• Take advantage of a lower SOV cost, especially if your competitors don’t advertise as much.

• Continue building your brand to help throughout the purchase funnel.

• People are looking for “help” during the recession, either in the form of lower prices, hacks or better value for money (additional features): give it to them whenever you can.

• In your creatives, be generous and supportive - you understand what your customers are going through.

A deeper dive

Not so bad right now, but…The Bank of Canada and economic experts are forecasting a mild recession in the second half of 2023, or early 2024.  According to a survey conducted by PWC, 76% of Canadian CEOs are expecting a recession - the highest percentage in a decade.  Lingering after effects of the pandemic, including supply issues and employee shortages, political uncertainty due to the war in Ukraine and tensions with China, and the recent collapse of two U.S. banks has made consumers around the world nervous. In Europe, there’s a general pessimism about the economy.However, the situation is a little different here in Canada. There is lower business debt, and Canadians generally have more personal savings.  More than one-third (35%) of Canadians say their financial situation is better than last year, while only 25% say it’s worse.  Nevertheless, prices are still rising in most sectors and Canadian consumers are fatigued; it’s a delicate situation.According to Statistics Canada’s January report, retail sales increased by 1.4%, driven mostly by automobiles, car parts and petrol. It is predicted that the petrol producing provinces will fare better than BC, Ontario and Quebec as a result. The Consumer Price Index shows food prices were up 10.4% year over year. Beverages, clothing, clothing accessories, shoes and jewelry were also up. Sporting goods and books were down.  Overall, sales volume increased by 1.5%.  Statistics Canada expects February sales will decrease by 0.6%. Keep spending in advertisingMarket share (SOM) is tied to share of voice (SOV) and advertising experts agree that this still holds during a recession. To gain market share, you need a greater share of voice.  Brands that cut their ad spend risk losing share, this is especially true for price sensitive categories like gas and clothing.  While companies who cut budgets may not see an effect in the short term, it is in the first year of economic recovery where they could see lower returns. Research shows that after the 2008 recession, strong brands recovered nine times faster. In addition, the cost of SOV is lowered during a recession - there is an opportunity for brand growth at a lower cost in a weakened economy.And if you cut advertising completely?  One Australian study showed that on average, pausing marketing activity for a year can cause a 16% drop in sales. This decline grows to 25% in two years.  Think longer termWhen survival is at stake, sales may drive your tactics. Companies leaning towards performance-based outcomes and diversifying their marketing distribution to find the lowest cost acquisition channels and strategies, such as affiliate marketing.  In their seminal book ‘The Long and the Short of It’, Peter Field and Les Binet explored the effects of brand building and sales driving investment strategies, and warned about short-termism.  It is key to look beyond short term ROI and consider the entire purchase funnel.Continue to build your brandAnalyses of 18,000 ads conducted by the research firm System1 in the past 4 years showed that heavy sales driven ads rarely drive brand building, but brand building ads, more often than not, help drive sales. These brand driven campaigns should not be linked to specific media types; they can be found along the purchase funnel.A Q1 2023 Sprout Social survey found that 77% of consumers are more likely to spend with brands they feel connected to (up from 57% in 2018).  Social media should definitely be part of your media mix during a recession. Be conscious of changing shopping habits Rapid, high inflation is changing spending habits.  Some are postponing expensive projects like home renovations or buying a car due to high costs and supply shortages.  Discretionary spending, however, appears to be supported by either accumulated savings or credit card debt, but for how long?  More than a third of Canadians (36%) are now reporting they are struggling to make ends meet, up 10 points since August 2022.  While the younger generations state their personal finances have improved, Gen X and Baby Boomers aren’t faring as well.  Overall, close to 40% of Canadians have reduced their spending on out-of-home entertainment versus last year, a similar percentage on clothing and 30%, on travel or vacations. Consumers are looking for better value, either in the form of lower prices, loyalty programs, installment plans or added premium features (to justify a higher price).  Historically, lower cost stores fare well in a recession.  Dollarama has seen a 12% sales increase.  Giant Tiger is expected to do well and it will be interesting to see how Zellers 2.0 is received in Canada.  The UK clothing retailer Primark will be opening in Buffalo in April, hoping to attract Ontarians across the border.At the other end of the spectrum, high end stores are also doing well.  However, luxury brands, which tend to be pretty much recession proof, may want to consider marketing “entry level” products to attract new customers, as Baby Boomers plan to reduce their spending in this category. As in previous recessions, making logos less conspicuous may also be a good idea.“Recession-core” is a new term that describes social trends that are popular in a downturning economy.  “Dupe” culture falls under this, where people on social media present cheaper alternatives to what’s trending - especially in makeup and fashion. “De-influencing” is another, coming from a very environmentally conscious younger generation tired of overconsumption. Other trends include “no-makeup” makeup, minimalism, buying locally and a second-hand economy.Demonstrate humanity, generosity and transparency in your adsDespite what experts are saying about the state of the economy, people are seeing changes in their daily lives and are focusing on their own financial situations.  Research conducted by IPA showed that ads demonstrating humanity and generosity (solidarity in adversity) tended to perform better in a recession.  That generosity can be in the form of tips, hacks, recipes, etc., to help consumers navigate harder times.  Many consumers are confused by the economic situation.  While they are price conscious, they don’t want to put their lives on pause again.  Some advertisers are focusing on celebrating “joyful moments”, which resonates with budget conscious consumers and/or those who are practicing more intentional shopping to enjoy life, but more modestly.Honesty and transparency is a judicious choice to explain why prices are higher.  It can also resonate with younger customers seeking to be more environmentally conscious.  However, don’t make it all about the numbers; consumers want concise, value-driven storytelling.