Woes Go Well Beyond Financial Flux

Marketers Take Some Solace in the Fact That Consumer Confidence Doesn't Have Far to Fall

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BATAVIA, Ohio (AdAge.com) -- The good news for marketers: The 500-point drop in the Dow last week didn't deal any serious new blows to consumer confidence. The bad news for marketers: Consumer confidence was already shot, and the market's sickening roller-coaster ride didn't help.

In a way, last week reflected Wall Street catching up to what Main Street already knew: The fundamentals of the U.S. economy are shaky at best. What this means for marketers is increased caution in consumer spending, particularly among near-retirement baby boomers; fewer high-ticket purchases of discretionary items such as cars and vacations; and even some bargain hunting in the grocery aisle.

Consumer confidence

Consumer confidence vs. the Dow Jones Industrial Average
At 9.2%, the current mortgage-default rate means that nearly one in 10 Americans is at serious risk of losing his or her home. Sales of new homes and automobiles are scuttling near 17-year lows. Credit-card delinquencies are rising. The unemployment rate rose above 6% last month. And Hurricane Ike ended a temporary reprieve in gas prices.

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Not surprisingly, the Conference Board's Consumer Confidence Index stood at 56.9 in August. While that was up modestly from the two prior months, it was just slightly more than half what it was a year earlier, when the housing crisis already had begun and high gas prices were already eating into consumer budgets.

The index, which is based on tracking surveys of 5,000 consumers each month on a variety of issues ranging from their purchase plans to their assessment of how hard it is to find jobs, in recent months has been hovering around its lowest levels since 1992.

Unfortunate milestones
That was even before last week's market turmoil, marked by the biggest bankruptcy of all time in Lehman Bros., followed by the biggest government bailout of all time in American International Group, followed two days later by an even bigger government bailout of the entire teetering financial system, estimated by Treasury Secretary Hank Paulson to cost hundreds of billions of dollars.

Keep in mind that even before last week's financial-market meltdown, the CCI was 33% lower than in October 2001, a month after Sept. 11. That was actually toward the tail end of the only recession many people in the advertising industry can remember.

So how much worse can it get following the market turmoil?

Surprisingly, maybe not much, and if it does, the impact probably won't last long, said Lynn Franco, director of the Conference Board Research Center. Some of the biggest declines in the Dow Jones Industrial Average have had very little impact on consumer confidence, she said, "and if you do get sort of a shock impact, it's short-lived."

The biggest one-day stock-market decline since the Great Depression, the 22.6% Black Monday plunge in October 1987, did send the CCI down 12% the following month, but it had regained all that ground three months later. A similar 12% confidence plunge the month after Sept. 11 was entirely erased three months later as well.

Elastic confidence
The long decline in the stock market in 2002 in the wake of the Enron bankruptcy, starting in June 2002, wasn't erased until two years later, but it also coincided with an extended decline in the stock market. News of the Enron bankruptcy itself in late 2001 actually registered no blip on the CCI.

"Unless there's a prolonged economic impact leading to job losses, you don't get an impact [in CCI from financial-market events]," Ms. Franco said. "We didn't see any significant impact from Bear Stearns because the index was already on a very sharp downward trend."
Walt Disney Co. CEO Bob Iger
Walt Disney Co. CEO Bob Iger Credit: Lisa O'Connor

For one of the biggest advertising sectors, now arguably the most troubled, it may be difficult for the financial markets to make things any worse.

General Motors Corp.'s Mark LaNeve, VP-sales, service and marketing in North America, said the automaker already had been affected by the credit crunch because banks and other lenders already have trimmed their purchases of subprime paper.

"I would say [the credit crunch] probably affected our business already to the tune of 10,000 to 12,000 units a month," Mr. LaNeve said. "I don't see the more recent developments exacerbating that problem. If anything I think we are getting to the point where you are going to start to see lots of actions to free up liquidity." Of course, GM, which lost $15 billion in its last quarter, has already said it is going to trim advertising spending.

Spreading pain
Consumer confidence was already near its lowest point since the index was introduced in 1955 before last week's Wall Street turmoil, said John Casesa, managing partner, Casesa Shapiro, and Merrill Lynch's former auto analyst.

The climate now "feels more like the '30s," during the Great Depression, he said. "The circle of pain is spreading rather quickly," and unless consumer confidence starts a remarkable turnaround soon, the slowdown in U.S. new-vehicle sales this year likely will worsen in 2009, he said.

Marketers of other high-ticket items, such as vacations, were also already struggling to climb out of a hole, and trouble in financial markets won't make that any easier.

"We have taken steps over time, and it's a fairly significant amount of time, to make [Walt Disney World in Orlando, Fla.] more accessible and more affordable," said Walt Disney Co. CEO Bob Iger on a July 30 conference call, explaining why Wall Street's woes hadn't been reflected much at the Magic Kingdom. He added: "74% of our rooms in Orlando are either value-priced or moderately priced. And that makes that experience much more accessible to more people, even in these more challenging times."

Even so, scheduled flights to Orlando are expected to drop 15% in the fourth quarter, according to Travelocity. Bookings to Hawaii also are off 15% compared with last year, and occupancy rates in Hawaii are at a 10-year low, with one in four hotel rooms empty island-wide.

Retirement anxiety
While financial turmoil may not make things worse for everyone, falling securities and real-estate values appear to already have had an impact on one of the fastest-growing segments of the U.S. population: retirees and near-retirees. Last month's CCI revealed a startling pattern of much more pessimism among older respondents nearing retirement.

The index last month came in at only 49.3 for heads of household 55 and older, compared with 74 for heads of household under 35. Only a year earlier, there was virtually no difference between those groups, with the index at 102.6 for those over 55 vs. 104.4 for those under 35.

Brent Green, principal in the direct-marketing consultancy BG Associates and a specialist in marketing to boomers, sees three reasons for the disconnect: Older boomers are cautiously eyeing their 401(k)s. They've lived through the relatively steep downturns of the 1970s and 1980s. And they heard from their parents about the Great Depression.

"We're going to see the [market turmoil] affect the psychology of purchasing, especially discretionary purchases," he said, particularly for boomers. "Whether that becomes an extraordinary problem in the market depends on how businesses handle it."

After outgoing Global Marketing Officer Jim Stengel talked for nearly a year about Procter & Gamble Co. incorporating more "value-oriented" messages in its marketing, the company increasingly is starting to do so, for instance by fashioning premium-priced Tide Total Care as a way to save money by lengthening the life of clothing.

Living without
But it's clear some categories are more immune to any downturn than others. Household and personal-care products, while slower, haven't slowed nearly as much as more-discretionary or big-ticket items such as cars or new homes.
P&G Global Marketing Officer Jim Stengel
P&G Global Marketing Officer Jim Stengel

Even within the grocery store, some big differences emerge. A Unilever study on "Winning Shoppers in Turbulent Times" recently found that relatively few (around 25%) said they would stop or decrease buying pet food as the economy worsens, but far more (more than 50%) would stop buying cookies, or only buy them on sale.

Home electronics, however, haven't been seen among the discretionary items -- yet. Best Buy reported sales up 12% last quarter, and Wal-Mart executives also have recently pointed to electronics sales remaining strong.

But in other areas, Mr. Green expects to see more marketers shift gears to fashion their offerings as solutions to hard times -- such as hotels offering coupons for free gasoline or marketers of recreational vehicles fashioning them as residential alternatives, not vacation alternatives. The gas may be expensive, he said, "but besides that you could live for $100 a month."

Call it "Grapes of Wrath," the 21st-century edition.

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Contributing: Jean Halliday, Claude Brodesser-Akner, Natalie Zmuda
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