Effect of economic crises on FMCG

Blog Stephan Knäble – Managing Partner Germany

Over the years, Stephan Knäble supported Marketing strategies of the top 50 consumer goods & retail companies in Germany. During the earlier crises that hit the economy Stephan followed the developments on purchase behaviour. He is a regular speaker to talk about this topic. Stephan has been active in market research over 30 years with a specialisation in buying behaviour.

The talk of the day is of course the outbreak of the coronavirus and the effect it has on day to day life. With restaurants and cafés needing to close their doors, and more and more shops following their lead. How will this affect our economy? And what are the effects of this crisis on Germany’s FMCG industry? Although we do not know what the magnitude is for the economy, it is important to realise what has happened during earlier crises.

2009 CRISIS AND THE EFFECTS

This is not the first economic crisis to hit our economy. The 2009 crisis is an example of this, with the overall German economy going down by 5% in 2009 compared to 2008, leaving 6 million people unemployed and 15.000 companies crashing. So, what were the effects of the 2009 crisis on the German FMCG industry, and are they in any way similar to the situation we’re currently in?

High income (25% of Households)
At the time, people with high income and sustainable available assets, had a low risk of losing their jobs. These people shifted from middle brands to premium brands and chose more indulging products, they didn’t go out as much and instead preferred more in-home cooking. Whilst spending less on traveling and durable goods. The total volume and total spend of this group in the FMCG industry was still growing. Leading to a trade up in the category.

Middle income (40% of Households)
The middle class with limited available assets feared unemployment the most out of all groups. They shifted to promotions and discounter products, kept buying mid-priced brands, but for lower prices. The total volume in the category from this group was growing, the people spend more time at home after all. However, their total spend on products was stable or even decreased, a result of buying cheaper brands in combination with the discounter effect. As a result, the category saw a trading shift.

Lower income (35% of Households)
The group with lower income and no substantial assets, had a high risk of unemployment. They shifted from buying middle brands to private labels and discounters. The total volume in products slightly decreased, with a shift to similar but cheaper categories for the same usage. Their total spend strongly decreased. Leaving the category with a trading down.

Winning brands
During this time, the winning FMCG brands implemented a countercyclical marketing mix. They spend more advertising money on branding, innovation, discounter listings and push bundle promotions, such as 2 for 1. Nevertheless, the overall spending in the category went down with -1%, less than all other industries in 2009.

2020 crisis

Despite encouraging numbers from 2009, the Covid-19 crisis is incomparable. Starting in March, nobody is quite sure when it will end. The behaviour patterns are totally different from past economic crises. A dramatic recession for 2020 is expected, similar to what happened to the economy in 2009. However, the situation we’re currently in, is far from similar. With people panic buying, most brands in the category will exceed their targets in the first 3 months. Next to that, with the effects of present and future curfews, there is a stronger in-home effect. People are worried about their health, and there is a lot more e-commerce available than 10 years ago. However, the income gap between targets is far bigger than in 2009.

The first results of the DVJ study done on purchase behaviour is that people start buying more in the supermarket. Not only to “hamster” but also because going out is replaced by cooking and eating at home. And as we have learned from earlier crises, people also want to give themselves a present.

What’s next

So, what is there to be expected for the rest of the year? My prediction is that premium brands will win in market share with stable revenue. Middle brands will most likely lose market share with decreasing revenue. Value for money brands or private labels, will also see an increase in market share with growing revenues. General insecurity might increase these effects. It’s a scenario we’ve never experienced before, so who knows what will end up happening to the FMCG industry, the economy, and our day to day life.

Interesting for me is also to follow the DVJ research on the impact it has on the overall attitudes of people in combination with their willingness to spend.