News Release: University News

Aug. 13,  2008

Rough Times Can Make Companies Thrive

From Knowledge@Emory

The turbulent U.S. economy is forcing Americans to make some tough choices. Suddenly, eating out, long car trips, and even the morning java fix are now subject to scrutiny as many Americans find they don't have nearly the amount of expendable income they once did.

And businesses are beginning to feel the bite.

In late July, Seattle-based coffee giant Starbucks cut 1,000 jobs and closed 61 stores in Australia alone. This move comes after the coffee chain already slashed 14,000 jobs and closed hundreds of stores in an effort to stem losses and win back customers. The belt tightening, which includes the release of several high-ranking executives, hasn’t had much impact as second-quarter profits for 2008 were down 28%. Even as Starbucks CEO Howard Schultz is making bold moves to right the ship, the future is uncertain. There are even murmurs that the company might be sold.

Although analysts blame the company's struggles on everything from out-of-control growth to increased competition from other chains, the faltering U.S. economy continues to make consumers more conscious of purchasing choices.

While spending $5 for lattes may be considered a luxury, faculty at Emory University’s Goizueta Business School say economic downturns impact different companies and different products in wildly different ways.

Andrea Hershatter, associate dean and director of the BBA program at Goizueta, and Reshma Shah, an assistant professor in the practice of marketing, note that some items— including such top-of-market goods as diamonds and luxury automobiles— may sell just as briskly in bad times as in good. Clothing and household goods may also prove fairly resistant to tough times, they add. Indeed, both Hershatter and Shah agree that such ephemeral luxuries as $5 cappuccino drinks undeniably make Starbucks vulnerable in times like these, they also contend that companies similar to the coffee giant can ride out the rough times, and even thrive, through smart strategy, good planning and, maybe most importantly, keeping a level head.

The latter is particularly important, says Shah, because reactionary decisions can have long-term consequences. "What companies can’t do is to fire employees, [randomly] close stores and stop advertising — that's the one thing most companies do. But all of a sudden, you're off the air and that much less top-of-mind. Those knee-jerk reactions get companies into a lot of trouble—they lose revenues,” contends Shah. Instead, “management should clean-up operations and [seek out ways] to be more efficient."

Plan ahead for tough times

Shah does concede that predicting how consumers will react during turbulent times can be tricky.

"It's really amazing how people's behavior has changed in the last three of four months," says Shah, who focuses some of her research on retention strategies. "For example, take how people act at gas stations with convenience stores. You're seeing a huge drop-off in traffic from the pump to the store. These customers are thinking, 'I'm already paying $50 or more at the pump, and I want nothing more to do with you.'"

Then there are other behavior changes that on the surface may look bad for business, yet might present a bevy of opportunities.

Take, for example, gas prices.

With the cost of a tank of gas doubling, many Americans are doing whatever they can to avoid driving. Telecommuting is more common than ever, while transit systems are recording their highest rider totals in decades. Earlier this summer, the American Public Transit Association reported that Americans took more than 2.6 billion trips on public transportation in the first three months of 2008, an increase of 88 million trips over the same period last year. The group said double-digit increases in light rail ridership were reported in Baltimore, Minneapolis, St. Louis and San Francisco and that, nationwide, usage of light rail (which includes trolleys and streetcars) was up 10.3%. Commuter rail ridership, meanwhile, was up nearly 6%.

Even those workers who must drive are being cost-conscious, attempting, for instance, to line up as many meetings as possible at a single location. For a coffee shop—even one that makes its margin charging $5 for a fancy beverage— this may well be good news.

"On the one hand, yes, consumption might be going down," says Shah. "But on the other hand, you might also see customers staying at your establishment longer."

The smart play, contends Shah, is to embrace customers and entice them to return.

Offer free wi-fi. Be as welcoming as possible. Make sure the customers you have keep coming back. Give them excuses to. "If there's something you can do as a marketer to ensure they keep coming back, do it," Shah says.

Build recession-resistance right into your business plan. It's a strategy companies such Disney, Gap and various car companies have successfully used for years. In the case of Gap, a leading specialty retailer, executives recognized there was a market to be grabbed both above and below the Gap's upper-middle class target. Eventually, the company created Banana Republic, for higher-end items, and Old Navy for the lower end.

In effect, the company bought itself recession insurance: In tough times, they may not get a customer to spend $25 on a belt at the Gap, but that same customer may well buy the $12 version at Old Navy.

"Part of this is just planning for an economic downturn,” explains Shah who notes the expansion of the Armani line to encompass Armani Exchange, which is geared toward younger customers and features an urban style and lower price tag. "People at some point realized the middle class had shrunk and the two ends had expanded. Companies need to be there for all of the different segments."

Adds Hershatter: "Inexpensive fashion items are red hot right now, with everyone from Hollywood stars to designers embracing fashion-forward concepts. Fun, trendy, almost-disposable clothing at places like H&M and Forever 21 are stigma-free. In fact, they present a different kind of status spending....sort of a "cheap is the new black." It certainly lures shoppers to realize they can re-energize their consumption without paying exorbitant prices, a trend that is leading to growth in this market even as discretionary spending comes down."

Diamonds never go out of style

As for those products with the exorbitant price tags?

Surprisingly, Hershatter says, they might not be affected as much by the current economic malaise. That's because, for some wealthy consumers, luxuries never go out of style.

"At the upper end, it's not immediately obvious that there's any reduction in consumer spending yet," Hershatter says. "A 12% drop on Wall Street is just not enough for people who have a great deal of disposable income to exhibit radical changes in consumer behavior. So far, what I am reading mostly indicates heightened price-consciousness, but not a total refusal to spend."

That's why Shah and Hershatter agree that the highest of the high-end products—cutting-edge fashion, BMW and Mercedes automobiles, pricey housewares and even jewelry—will retain the bulk of their market, even if the economy tumbles further.

These items have both cache — which means both status-seekers and longtime customers will remain brand-loyal — and durability, which gives these products some sense of "value."

"You have functional products and experiential products," Shah says. "And then you have value-expressive products, which are intended to show some kind of status. The real issue for companies arises when people are considering trading down in the experiential goods category, because they're not going to trade down in the expressive goods — clothing, jewelry. Because of self-image, people are not as likely to change those behaviors."

The same trend, unfortunately, does not translate to companies like Starbucks or even pricey organic grocers such as Whole Foods, which saw second quarter earnings drop this year and also missed earning estimates. For them, the bond between customer and product may not survive belt tightening efforts.

"Unfortunately for Starbucks they've become a target," explains Hershatter. "The $3 cup of coffee has become a symbol for small luxuries adding up to big spending. You hear analysts advising, 'If you want to save $700 a year, give up your Starbucks latte.' This is echoed by similar advice like 'pack your lunch' and ‘skip valet parking.' So, I think some of the more ephemeral luxuries like daily lunches out or delivered dry cleaning are more vulnerable than high-end furniture or even jewelry, which, while certainly a luxury, can in some sense be justified as an investment or at least a durable good.

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