There exists conventional wisdom in business that in a recession there are winners and losers. Some businesses can do very well during a downward cycle. Also I’ve heard and read many times over the years that businesses who do well during a recession experience a boom time when the cycle climbs upwards again.
I wonder if this wisdom from the past is at play today, in particular in the retail sector.
First a piece of logic. If a market sells 1000 units a year in good times but then goes in to a downturn and demand drops by ten per cent the loss will not be evenly spread across the market. Say brand A selling 500 units maintains volume, it means the drop in sales will be more severe for other brands. This must be true today with retail because the public are spending something rather than nothing so a) what is the drop in spend and b) who are the winners and the losers?
Further, given the example above, it is highly likely the brands taking a bigger hit than the brand leader may well take action to prop up demand, such as slashing prices which in turn leads to an even bigger drop in margin.
In retail I wonder if a big influence is to do with the shopping experience; do consumers opt for a better experience when times are tough – why go to a miserable outlet rather than somewhere that cheers us up?
Just after Christmas we went to a Blacks store in London. We did know the rumours about Blacks but it was before they went in to administration. We found our store visit dreary and not remotely inspiring. We were after high ticket items for skiing and we left empty handed. It felt sad, tired and without the slightest attempt to capture the emotion of outdoor pursuits. The staff were not engaging on any level; maybe they were just waiting for the axe to fall.
During the latter half or 2011 there were various articles in the business press about Argos not performing too well and it made me think about their retail experience. It has been around for a long time, over 30 years at least, and again I wonder if it is simply outdated. There is one opposite my old office in central London and I found it a functional experience without any charm or attraction. The prospect of buying a flat screen TV from Argos takes away all of the enjoyment of browsing and chatting to people who know what they are talking about. As it has turned out they did have a tough time and I would have thought the HQ team will be thinking about every aspect of their business model.
By comparison the Apple stores are truly magnificent brimming with energy, interest and amazing staff. The comparison between Apple and Argos isn’t really fair but nevertheless one has world class brand values and the other hasn’t. This is reflected in every tiny detail of both experiences.
My point is, why walk in to a downbeat store when you can walk in to an upbeat store? When times are bullish and people are spend, spend, spend then maybe there is enough to go around for everyone but when belt tightening is the order of the day perhaps the downbeat stores are the first to suffer. Remember Woolworth?
How come John Lewis has had a storming year although margins have suffered due to their less fortunate competitors dropping prices? I have this image in my head of the UK’s middle classes congregating in John Lewis to mix with their peers and pretending everything is OK in their world.
Another story has been Tesco and I’m not surprised. Other grocery retailers have upped their game, in particular Waitrose. Again the experience of both is chalk and cheese. I may well be paying a bit more at Waitrose but the shopping experience is just superior on every level.
In the end I would suggest, my hypothesis anyway, that times like these are where genuine brand values really count. I mean real values that percolate across the whole organisation and can be felt, touched, soaked up and enjoyed. If I have £10 to spend I would prefer to do it with a brand I like and respect rather than one I don’t. Same money, same product, just expressing a preference for which one to hand my money to.
I completely understand that there are numerous variables that can influence the fortunes of any business and it would be naive to suggest that strong brand values on their own will support a business in difficult times. However all of us who work in the wider world of advertising, branding and marketing know what consumer research tells us consistently. The balance of the rational and the emotional is very important to understand.
A sector I know quite well is travel, in particular air travel. This balance of emotional and rational plays an important role in choices people make. Rationally why pay more for one airline for a flight to, say, Rome from London when you can get a cheaper option? At the end of the day you are paying for a journey that lasts about two hours. The emotional considerations will kick in based on preference of airline despite the price difference. All the research available tells us a list of considerations will influence the final decision and the bottom line is a balance of perceived service and convenience and then cost.
The value equation is not solely about price, if it was nobody would choose BA or Alitalia on the Rome route but they do. Air travel is a segmented market in terms of customer groups, which is why low cost and full service can operate side by side. The rational and emotional balance varies significantly person by person.
2012 will continue to be a challenging year for many businesses, especially retail. All things being broadly equal I would speculate that retailers with strong and genuine brand values will perform better than than overall market in the year ahead.