Looking back to the future

The CBI, FT, IOD, OECD, and other institutions that constitute the alphabet soup of economic forecasting are agreed – the current economic downturn will become a full-blown recession in 2009. There was a time when we were quite used to recessions. The one in the early 1980s came only a few years after the one in the 1970s. The one in the 1990s came less than 10 years after the one in the 1980s. But this recession will be our first for 16 years. Many of us may have forgotten what recession is like and, in particular, how consumers behave in them. So what might pub and restaurant retailers learn from the experience of previous recessions? Whilst trading will be tough, opportunities exist for those who understand the new consumer psyche. Looking at total consumer spending, while spending on alcohol and spending on eating out changed, quarter by quarter, from the onset of the 1990s recession, it is worth noting two important points about consumer behaviour and recessions. First, recessions can get off to a slow start. Second, recessions can have a long tail (data for the 1980s recession reveal the same pattern). Spending across all the categories held up pretty well in the first few quarters of the last downturn. This makes perfect sense. At first people are not sure if there will be a recession and then they are not certain about how deep or sustained in will be. The 1990s recession only began to bite into consumer spending when consumers became clear that the recession was for real. Unemployment is of crucial importance here. It is the economic indicator that can do most to undermine consumer confidence. Not only does it transform the spending behaviour of those who lose their jobs, it also has a ‘vicarious’ effect. People who are still in work, but have seen a friend, a family member, a colleague or a neighbour lose their job reign in their spending fearing they may be next. We are lucky to have started this downturn with relatively high levels of employment. But September’s figures suggest an acceleration in the unemployment rate. Future unemployment levels will be key in determining the depth and duration of the recession and its impact on consumer spending, especially in discretionary sectors like drinking and eating out. Recessions can also create an extended, depressing effect on consumer spending, lasting long after the ‘official’ end of a recession (defined by when GDP starts to grow again). Though the 1990s recession officially ended in Q3 1992, in early 1995 we were still wondering aloud about when consumer confidence, and spending, would return to some sectors of the economy. The fact that consumer confidence and consumer spending cannot be turned on and off like a tap is worth keeping in mind when economists today talk about recovery in 2010. That recovery, even if it happens, may not be reflected in consumer spending for some considerable time. Trends accelerated and trends derailed A recession can reflect or exacerbate trends which were already present in a market place. For example, the relative decline of beer and spirits was already underway by the time the 1990s recession hit. The recession seemed to accelerate the trend and make things worse. In contrast, spending on wine, which had been growing, held up relatively well. So, this time round, it seems likely that sectors that have been doing well will suffer less in the downturn, and those that have been struggling will suffer further still. That said, some trends are completely stopped in their tracks by recession. For example, time series data from Mori suggest that concern about the environment peaked in July 1989, just as the last recession began. At that time 35% of the population thought that ‘pollution and the environment’ was the, or one of the, major issues facing the country. By January 1991, this figure had dropped to 5%, and has never fully recovered to this day. This time round the impact of a recession on green and ethical consumption is likely to be more subtle and complex. On the one hand, as price consciousness increases, it will be much more difficult to persuade consumers to pay a premium for organic or fair-trade goods, for example. However, other green behaviours that save money for the consumer (such as, drinking tap water rather than bottled water) are likely to prove increasingly popular. Whereas, the new green campaign to persuade us to become vegetarian to save the planet will probably not be affected by the recession one way or the other. Opportunities and lessons One other thing we know about recessions is that, even within the same sector, some businesses thrive as others struggle and fail. Perhaps the most important lesson is that it is dangerous to generalise about consumers’ experience of recession. Different groups are impacted differently. There is an important distinction to be made between those who have no choice but to cut back and those who cut back because of reduced confidence. The latter can be tempted in to spending, even splashing out, from time to time. Indeed, the 1990s recession was the making of some markets that involved small, self-contained, luxurious treats. These benefited from what became known as the ‘sod it’ factor. The ‘sod it’ factor tapped in to the feeling that, even though we may be cutting back in most areas, life has to be worth living – so I will have a quality coffee and pastry, a bite to eat out, or a decent glass of wine, for example. Similarly, different demographic groups will have different prospects and behaviours in a recession. Paradoxically, the twenty-something demographic could be a good target in the coming recession. For years, they have struggled and failed to get on the housing ladder. Now they will be one of the few groups with disposable income not to be affected by falling house prices. Finally, and keeping in mind the point made about unemployment above, recessions are often experienced very differently by region. The South of England largely escaped the 1980s recession, and yet was more acutely affected by the 1990s recession than the North (where low or stagnant growth remained a constant feature). At the moment it is not clear which regions will suffer most, but differential regional employment prospects are something to watch. Paul Flatters is managing partner at Trajectory, a group that specialises in analysing and forecasting social trends. Visit www.trajectorypartnership.com or email paul@trajectorypartnership.com