The Economy Looms Larger Than It Used to in Shoppers’ Decisions
A Q&A with Chicago Booth’s Sanjay K. Dhar on how changing household fortunes drive consumer behavior
- August 26, 2024
- CBR - Marketing
If I go back to when I first started my research more than 30 years ago, we would often study what companies were doing in the grocery space—introducing a private label, merchandising a brand using different tools, innovating the retail format, using a different kind of coupon—to guide consumer behavior. But in the past decade, macroeconomic events have played a bigger role in the choices consumers make.
With that in mind, University of Washington’s Shirsho Biswas, my Chicago Booth colleague Pradeep K. Chintagunta, and I recently looked at what happens to consumer purchasing behavior when household wealth, income, or employment status changes. This relates to earlier work we did on consumer responses to the Great Recession, and it helps to generalize those findings. Every economic shock is not the same—during a recession, your concern might be how you’re going to put food on the table; during a pandemic, it could be more about staying healthy. So what patterns can we observe across macroeconomic events?
Brand managers allocate promotional dollars based on where demand is. On the retail side, category managers allocate funds based on what kind of brands people will be purchasing. Marketers need to be able to predict how economic shocks are going to affect what shoppers want.
Consumer responses are more nuanced than broad trends make them appear. For instance, we find that a 10 percent increase in income is associated with a substantial rise in spending on products that are not consumer packaged goods. Within CPG, that income shift results in dollars being taken away from the grocery store and going to warehouse clubs and discount stores, with more spending on national brands versus private labels.
It’s generally accepted that when the economy is booming, national brands do well, and when it slows down, private labels do well. But our research demonstrates that in both cases, those brand types don’t do well everywhere; they just do well on average. So the nuances of the interplay between product types, brand types, and store formats really matter for companies’ decision-making.
The way we want to think about it more broadly is that demand opportunities are created or taken away. For instance, COVID caused demand opportunities to be taken away from in-store purchasing and created for online shopping. Although the pandemic was a temporary event, that effect is not entirely reversible because people learned how convenient it is to buy things online, have groceries delivered, or order dinner through an app.
Demand opportunities are appearing and disappearing; new ways for value to be created and captured are emerging. All these changes are happening a lot more frequently today and have happened a lot more in the past 10 years than in previous decades. But it’s cyclical. Right now we’re going through a lot of turmoil—economic, political, and social—which means macro events are playing a bigger role. Once the dust settles, I think we’ll go back to optimizing brand and retail strategies.
Sanjay K. Dhar is the James M. Kilts Jr. Professor of Marketing at Chicago Booth.
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