The Marketing Environment.docx

The Marketing Environment.docx

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TheMarketingEnvironment

COFFEE,LIPSTICKS,ANDTHEECONOMY

Starbucks'decisiontoclosesixhundredcoffeeoutletsappearstobedrivenatleastinpartbya"triplewhammy:

"Increasingcompetition,aweakeconomy,andthedrainonconsumers'walletsresultingfromthecurrentalltimehighgasolineprices.

Thefirstfactor—increasedcompetition—isactuallyafairlycommononefor"evolving"productcategories.WhenStarbucks'spurredonthemassmarketforhighqualitybrewedcoffeeintheU.S.somefifteenyearsago,thechainfacedonlymodestcompetition.Fastfoodchainsanddonutshopsfeatured"regular"coffeeatlowerpricesandafewsmallchainsandlocalestablishmentsservedthehigherendclientele.InsuchanearlyphaseoftheProductLifeCycle（PLC）,thegrowthindemandisoftengreaterthantheincreaseinsupplythatresultsfromtheentryofnewfirmsintothemarket.Thus,pricepressure—andtheriskthatyourcustomerswilldefecttolowercostalternatives—tendtobelowerthantheyareinmore"mature"productmarkets.Now,however,anumberofotheroutletsofferpremiumcoffee—itnotalwaysquiteinStarbucks'league—atsignificantlylowerprices.TheentryofMcDonald'sandothernationalchainsintothepremiumcoffeemarketcategoryisnorealsurprise.Inmostindustries,thereisalimittohowlongonefirmcancontinuetodominatethemarket.

Withaweakereconomy,manyindividualsareworriedaboutlosingtheirjobs.Othersdonotgettheover-timeandbonusestheyhavecometoexpectduringbettereconomicdays.Thatthreedollarpluscupofcoffeeis,realisticallyspeaking,oneoftheeasierthingstoeliminatefromone'sbudget.Athreedollars-a-dayhabit,afterall,translatesintosome$1,000overthecourseofayear.Itismuchmoredifficulttocutfromthefamilygrocerybudget.

Problemsarenowcompoundedbyalltimehighgasolineprices.Intheshortrun,thereisverylittlethatmostconsumerscandoabouttheirgasolineconsumption.Theycancutbackondrivingvacationsandotherunnecessarydriving,butthereareoftennotattractivepublictransportationoptionsforgettingtoworkorpickingupchildrenfromschool.Manyconsumersarenowstuckwithbig,low-gasmileagecarstheypickedupwhenoilpriceswerelower.Ironically,becausemanystilloweagreatdealonthesecarswhoseresalevaluehasnowdeclined,switchingtomoregas-efficientcarscanbedifficult.Thiscompoundsthebudgetproblemsthatmanyfamiliesareexperiencing.Thereisclearevidencethathighgascostshavecutinsignificantlytoconsumerretailpurchases,especiallyattheendofthemonth.

DoesthismeanthatvendorsofhighcostluxuryproductslikeStarbuckswillgooutofbusiness?

Hopefullynot.WearenottalkingaboutgourmetcoffeeaficionadoscuttingoutStarbucksentirely.Manywillcontinuetogo,albeitnotasregularly.However,businessesthathavehighfixedexpenses（thecostofrealestateandlabor）andmuchlowervariablecosts（thecostoftheactualcoffeeandcups）arehighlysensitivetovolume.Thus,atenpercentdeclineinsales,forexample,resultsinmuchmorethanatenpercentdeclineinprofits.Ifcustomersoptforlowerpriceditemswhentheyactuallydogo,thisproblemiscompounded.

Ironically,another"luxury"productactuallyseemstothriveduringrecessions（seeTheso-called"LipstickIndex,"basedontimeseriesanalysisoftheeconomyandsalesoflipsticks,actuallysuggeststhatlipsticksalesgoupduringbadeconomictimes.Thehypothesisisthatalipstick—evenaratherheftilypricedone—isanaffordableindulgence.

THE2008TAXREBATEAND

CONSUMERBEHAVIOR

Thetaxrebatesthatwillbereleasedthisyearhavebeentargetedprimarilyatlowertomiddleincomeconsumers. Theseconsumersarelikelytohaveahigher“marginalpropensitytoconsume”—thatis,theyarelikelytospend,ratherthansave,ahigherpercentageofanyadditionalincometheyreceive. Thistypeoftaxrebate,then,islikelytogetagreater“bangforthebuck”thanrebatesaimedathigherincomeconsumers.

Researchsuggeststhatpeoplewilloftenfeelmorefreetospend,ratherthansave,thistypeof“windfall”moneythantheywouldbeifithadbeenreceivedasananticipatedraiseatwork. Itismoneythathadnotbeencountedon,anditisthereforeseenassomethingmore“appropriate”tospend.Becausemoneyis"fungible"--thatis,moneyisworththesameandcanbespentonthesamethingsregardlessofitssource--thisbehaviorisnotentirelyrational.However,agreatdealofresearchinthefieldof"mentalaccounting"showsthatthesourceofmoneyandthewayitispresentedhavealargeimpactonthedecisionsonconsumersonwhattodowithit.

Inthecomingmonths,manyadvertiserswillprobablycomeupwithnumerous“suggestions”astohowconsumersshouldspendthismoney. Ahouseholdwithtwospousesplustwochildrenarepotentiallyeligibletoreceive2*$600+2*300=$1,800,whichisenoughtobuyoneormore“bigticket”itemssuchasalargeflatscreenTVoracomputer. Alternatively,consumersmayspendthismoney“piecemeal,”eatingoutatrestaurantsmoreorbuyingseveralsmallthings.

Becausefoodandgasolinepriceshavegoneupdramaticallyoverthelastseveralyears,anincreasingnumberoflowtomiddleincomeconsumersarefacingaconsiderablebudget“crunch,”especiallyattheendofthemonth. Wal-Mart,intheearly2000s,initiallyseemedtobenefitfromthedecliningeconomyasconsumesswitchedmanyoftheirpurchasestolowercostoutlets. Now,however,manyconsumersarehavingtroublemakingendsmeetevenatlowerpricestoresandmanyhave,asaresult,reducedtheirpurchases. Thetaxrebatemayallowmanyoftheseconsumerstobuysomeofthesethingsthattheywouldotherwisenothavebeenabletobuy. Forsuchconsumers,then,therewouldnotnecessarilybeanybignewpurchases;rather,theeffectwouldbetoreducethedeclineinearlierspending. Recently,foodpriceshaveincreaseddramatically. Thisoccursbothbecausethecostofproductiongoesupwiththecostofenergyandbecauseanumberofagriculturalcropsnowbecomemorevaluablewhentheyare“diverted”tomakingfuels. Whencornandothercommoditiesareconvertedintogassubstitutes,thevalueofsubstitutableothercommoditiesinturnfaceincreaseddemand,resultinginahighermarketprice.

Theremayalsobesomeconsumerswhomayactuallysavetheirrebatemoneyratherthanspendingit.Manywillchoosetodothisinlargepartbasedonthefearthattheymaylosetheirjobsoropportunitiestoworkovertimeinthefuture. ThistypeofsavinghasbeenaproblemthathaslimitedtheeffectivenessofthistypeofstimulusmeasureinJapan’seconomywhichexperiencedasignificantdownturnduringmanyofthelasttenyears.Ratherthanspendingmuchofthisextramoneyavailable,consumershave,instead,putawaythemoneyinanticipationofa"rainyday."Ironically,thisislikelyagoodstatetegyfortheindividualfamily,butnotsogoodforthenationaleconomy.

OnepotentialproblemwithmanybigticketpurchasesisthatmanyelectronicproductsthesedaysareimportedfromlowwagecostcountriessuchasChina. Whenimportedproductsaresold,thenetcontributiontotheU.S.economyislimitedtothe“valueadded”componentofdistributionintheU.S. Thatis,suchpurchasesmayincreaseretailanddistributionemploymentintheU.S.butnotmanufacturingemployment.

Partoftheeffectivenessofanystimulusmeasuresuchasataxrebateistheso-called“multiplier”effectwherebymoneyisre-spentasthosewhosell—andtheiremployees—inturnspendpartoftheirearnings. Ifconsumerspatronizerestaurants,forexample,theiremployeeswilllikelyworklongerhoursandreceivegreatertips,enablingtheseemployeestobuymorewhich,inturn,spursonthecycle. Restaurantownersmaydecidetoexpandtheirfacilities,inturncreatingjobsforpeoplewho,inturn,spendtheirmoneyelsewhere.

April9,2008

GASOLINEPRICES,CONSUMERS,ANDTHEECONOMY

Thecurrentgasolinepricesarelikelytohavealargeimpactonconsumerspendingbutamuchsmallerimpactontheamountofgasolinepurchased.Instead,theeffectislikelytobefeltinotherareasofspending（e.g.,vacations,entertainment,electronics,oreatingout）.

Source:

U.S.DepartmentofEnergy

http:

//tonto.eia.doe.gov/dnav/pet/pet_pri_gnd_dcus_nus_w.htm

Economistsgenerallytalkaboutthe“priceelasticity”ofcertainproductsandwilloftenpredictthataonepercentincreaseinthepriceofaproductwillresultina,say,twopercentincreaseconsumptionor“quantitydemanded.”

Theideaofthisdecliningconsumptioncanbeexplainedintermsofthetraditionalconceptsof“supply”and“demand.”

Shorttermforgasoline,however,appearstoberelatively“inelastic”—thatis,whenpriceschange,thereisrelativelylittlechangeinthequantitydemanded.Thisiswhy,whentheworldsupplyofpetroleumchanges,veryaverylargechangeinpriceisusuallyneededtobringsupplyanddemandintobalance.Supplyanddemandchartunderinelasticdemandlooksmorelikethis:

NOTE:

Thenumbersinthischartare

fictionalandusedonlyforillustrationpurposes.

TheydoNOTrepresentobservedmarketresponse.

Theredcurverepresentsconsumerdemand,stayingconstantduringthehigherandlowersupplyconditions.Thetopbluecurverepresentsthequantitysuppliedatagivenpricewhensupplyislow.Becausethesupplyislow,supplierswillwantmoretosupplyagivenquantitythanisthecaseforconditionsofhighsupply（thelowerbluecurve）whereagreaterquantitycanbehadagivenprice.Notethatbecausethedemandisrelativelyinelastic,the