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Rethinking the 10 Commandments for Doing Right in a Recession

The U.S. economy is experiencing a record-setting period of expansion. No expansion has ever gone longer, yet this expansion is also one of the weakest ever. Compared with the past, average annual GDP growth during this expansion has been below par.

While the length and slow pace of an economic expansion does not inherently raise recession risks, this historical context is still needed given the social, political, and industrial impact the pace of growth has likely had on key segments of our economy. Out of frustration or disappointment with economic growth, some policy-makers, investors, and consumers are venturing into unprecedented, and likely risky, areas. This is a concern because two of the three broad variables that have tended to trigger past recessions are a credit crisis or a sharp change in policy.

The third variable is an unexpected event or one without any measurable outcome. Typically, these are global, and in our more connected world, more dangerous. Cross-border tensions related to U.S. sanctions, military aggression, or trade are rising, increasing the chances that one of these events will occur.

With these three risks rising and negative effects appearing in the form of slower global growth, investment, and trade, brands and retailers need to prepare an alternative plan for a slowdown.

With this volatile and uncertain outlook for the marketplace, a concise, clarifying view is needed. That is the purpose of Kantar’s Recession Watch. As the U.S. economy reacts to new developments, changing policies, and evolving situations, Recession Watch will provide a timely and critical eye on the state of the economy.

This introduction lays out the specific Recession Watch framework and the plan for this series.

While the Recession Watch perspective will be U.S.-centric, the framework for assessing economic impacts and business implications can be used in every market. The framework disaggregates the impact of a downturn by looking at how three types of households will be affected differently. What a slowdown means is not the same for every household, and thus, not the same for every industry or brand. The mix of household types specific to an industry or brand is actually the key factor in knowing what to watch for.

For economic impacts, households are best understood based on a household budget typology. Other demographic or lifestyle criteria may also be relevant, but only when filtered through what budgets allow. Two households may look exactly alike demographically, but one may be better able to cope with a slowdown because of a better financial situation. That is the unique perspective of Recession Watch.

This framework was first developed in a March 2019 Kantar white paper entitled “Going Fast in a Slowdown.” Households are best grouped by their financial situations as a slowdown begins. During a downturn, financial circumstances override all other considerations. With finances front and center, a financial focus is needed.

Household financial situations fall into three groups. Most vulnerable to a recession are cash flow households. They live paycheck to paycheck with few or no assets and reserves, but it is important to note that many of these shoppers derive their cash from sources other than a routine paycheck. They are coping. Income statement households have a steady paycheck and some reserves or assets. They are budgeting. Balance sheet households earn a generous paycheck, have strong, secure assets, or both. Their style of spending is best described as funding.

Each household type has different levels of exposure to different economic scenarios. Big employment losses would hurt cash flow households most, while big stock market losses would affect balance sheet households most. Thus, the best way to gauge the consumer economy is one based on financial situations.

The more nuanced view the Recession Watch framework offers has a direct bearing on business leaders’ expectations for how households will respond to financial pressures during a downturn. These rules of thumb inform decision-making and investments during slowdowns. However, because the financial vulnerabilities of these three household types have changed dramatically since the financial crisis of 2008-2010, these old guidelines are not as helpful as they used to be. Households will no longer react in these ways.

In fact, business leaders view as conventional wisdom 10 rules of thumb about what consumers will do during a recession. These assumptions are, in effect, the 10 commandments to best manage brands during a recession. Unfortunately, with the sorts of financial situations that characterize contemporary households, these commandments have become archaic. Households will not — or cannot — react in exactly these ways any longer. Thus, these assumptions no longer offer reliable guidance for “doing right in a recession”.

The 10 commandments that we need to rethink

    1. Thou shalt have no other solution but trading down.
    2. Thou shalt idolize only the Federal Reserve and other central banks.
    3. Thou shalt not take wages and salaries in vain.
    4. Keep away from major purchases.
    5. Honor only essential purchases.
    6. Thou shalt not waste time with advertising.
    7. Thou shalt not betray any interest in nonfunctional benefits or appeals.
    8. Thou shalt not steal away from dollar stores in times of woe.
    9. Thou shalt not bear false witness about sticking with online shopping.
    10. Thou shalt not covet name-brand products.

In addition to monitoring the state of the economy through the lens of household financial situations, Recession Watch will, in installments over the next few weeks, re-examine each of these traditional 10 commandments in a new light to provide new and better guidelines for growing and protecting brands in the economic environment of the moment.

Meet with Bryan, Doug, and the rest of the Kantar team at the Retail Insights Conference, Dec 11-12 in Atlanta.

Contact us to learn more