Author： Lilien & Loch Educational Consulting Columnist, Ms. Xiao Liang, from National University of Singapore
Starting from the housing bubble and subprime mortgage crisis, to Wall Street's woes, to depression in gross domestic product, the Global Financial Crisis of 2008 has swapped almost every corner. It is the worst since the Great Depression in 1929.
United States, Spain, Portugal, Germany, Sweden, Finland are in recession and many more including China have been severely affected . On 19 December, Royal Bank of Scotland forecasted China’s 2009 Gross Domestic Product Growth to 5 percent, which is far behind the expected growth of 12 percent to meet GDP target, according to Mr. Li, Yizhong, the Minister of Industry and Information Technology.
Consumer Reaction across Income Groups: the Rich become Bargainers Heidi Dillon , a 55-year-old American philanthropist, rarely bought on sale before, believes that the crisis has permanently “altered her spending habits”. She has purchased a Michael Kors fur at its half price and a $1,200 pair of shoes that was slashed to $600. After spotting a $4,800 Jil Sander leather jacket half-priced, she asked a salesperson when the next markdown would be.
Meng Feng , a 33-year-old officer in a Chinese Financial institution, earns RMB15,000 a month. In China, he is considered in the high-income class. However, just a few days ago, he abandoned his plan to purchase cars this year.
In general, financial crisis will influence lower and middle income consumers. They will carefully calculate before spending every penny. But this financial crisis has spread its effect to the higher income group. The wealthy who never looked at discounted goods before take advantage of every opportunity to obtain a better bargain. This year, luxury sales has dropped 34.5 percent in the first week of December from the same period a year ago, according to SpendingPulse, a data service provided by MasterCard Advisors.
However, the cutbacks by upper-income consumers are different from lower and middle-income consumers. The affluent will not trade down to lower-price brands and stores, instead, they will limit the volume they purchase. For example, while buying six pairs of shoes at $700 each last year, they will buy just two this year. Michael P. Niemira, chief economist at the International Council of Shopping Centers, said “the economy depends on spending by the wealthy because of their dominance in discretionary purchases, from boats to furs”. The change of behavior in American upper-income consumers has aroused concerns of many economists.
According to Gallup Poll September 2008, the percentage of upper-income Americans rating the economy poor increased from 26% during the first week of September, to 41% during the third week, to 46% by the end f the month. Such attitudes of lower-income consumers keep at 54%. The disproportionately increase in negative attitudes of upper-income consumers indicates the gradual impact of financial crisis across consumer groups.
Consumer Reaction across Market Channels: Online Shopping Populates Though experiencing economic downtown, retail sales online is expected to increase by 39.9% to GBP 7.0 billion this Christmas in UK. Internet reduces the searching cost for consumers who have become more and more scrutiny during the crisis.
In China, many youngsters utilize Internet to save money. Popular methods include online shopping, online discounts and coupons, online match and mix, online rent, and etc.
The design house Viktor and Rolf tried to save money by airing an online film of their collection rather than staging a show. We expect a more promising picture in Internet shopping in current financial crisis.
Consumer Reaction across Product Categories: Inferior Goods are Needy As always, in financial crisis, consumers will searches for inferior goods. “One study we saw showed that 59 percent of Americans plan to eat out less,” said Ramin Ganeshram, director and consumer strategist for Food and Beverage at Iconoculture, “consumers are shopping for ingredients to make meal at home.” In China, similar situation occurs. Mr. Ting Ming from Beijing cancelled family gathering at restaurant every week; Ms. Yang Jiajun who used to go out to eat at weekends chooses to cook at home now; The reservations for dinner at Spring Festival Eve are that few.
The current financial crisis will remove more than 25 billion from the semiconductor market in 2009. Ms. Chen Wenjun, who previously planned to travel to Hong Kong, now decided to visit Shanghai instead. The number of Chinese travelers to South Asia has declined for approximately 20% compared to last year. Sales of cars also have stalled. By 2007, sales of cars in China grow at the rate approximately 20% per year. However, sales of cars have declined, compared to those of previous year, 7.8% and 7.0% in August and September 2008 respectively.
Current Financial Crisis vs. Dotcom Bubble The Dot-com bubble crash wiped out $5 trillion in market value of technology companies between March 2000 and October 2002. The change in consumer behavior by the dot-com bubble contributed to the housing bubble, which in turn leads to the current financial crisis, as agreed by Yale economist Robert Shiller. According to U.S. National Credit Union Administration, consumers began to shift savings from stocks and money markets to safe harbors such as insured financial institutions after the dotcom bubble. Real estate lending boomed as interest rates began creeping downward and consumers purchased or refinanced homes. This change in consumer behavior makes housing as the national obsession, said Shiller in 2005. However, compared to the current financial crisis, dotcom crisis changes consumer behavior but not significantly affect it.
Current Financial Crisis vs. Asia Financial Crisis in 1997 The Asia Financial Crisis 1997 started with the financial collapse of the Thai baht. Different from current financial crisis, this crisis is created at macro-level by policies that distorted incentives within the lender-borrower relationship. And the speed and scope of it is attracted many researchers attention. It ends rapidly - In 1999, Asia saw a recovery in economy- and most of the developed countries are unharmed.
Compared to them, the current financial crisis will lead household long-term adjustment to borrowing less and saving more, according to James Cooper, BusinessWeek’s senior editor and senior economist. Gary Shilling, economic consultant an investment adviser, expected to see the biggest decline in consumer spending since the 1930s and the worst recession of the post-World War II era.
A Summary of Consumer Behavior in Current Financial Crisis
- It has affected long-term consumer behavior.
- It has affected not only lower and middle income consumers but also upper-income consumers.
- It populates e-commerce, such as online information searching and online shopping. We expect e-commerce will be promising in such a harsh winter.
- It largely affects consumption product categories. As always in financial crisis, consumers turn consumption to inferior goods.
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