marketing & business strategy brief

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© Roy Morgan Consulting. [email protected] of 12

Welcome to the inaugural issue of the “Marketing & Business

Strategy Briefing”, this is the first of my monthly newsletters that will be sent to subscribers that are interested in the broader issues that drive the outcomes of a business and

marketing strategy.

When we see what is happening around us at the moment with the traditional liberal capitalism collapsing along with

global financial markets and economies, we need to step back and remember that the world has been changing for some time as we are shifting from the 20th century world order to the 21st century world order, and new powerful economic

powers are starting to shape.

Each issue of “Marketing & Business Strategy Briefing” will provide updates on local and global issues that all strategy managers should consider and the impact these issues will have on

their company outcomes.

Anyone hoping for a period of calm after the turmoil of the past year will be disappointed as 2009 promises to be a year of bracing adjustment to a very changed world. This is because the aftershocks of the financial crisis of 2008 will be rumbling on in 2009. After an extraordinary

boom, in which the world GDP rose year after year by between 4% and 5%, global growth will slide below 3%. The rich economies will be in recession with bankruptcies, belt-tightening and rising unemployment.

In the emerging world, growth will be less spectacular than before, but in many countries it

will – with luck – remain relatively robust. We are at the cusp of a shift from the 20th century world order to the 21st century world order and the shift in global economic power to places such as China, Brazil, Russia and India will begin to take hold and these countries will expect a

bigger say in how the world is run, so fasten your seat belt for the ride.

This issue covers the current market downturn, with commentary on the United States, China and Australia, and the impact on unemployment and therefore consumer confidence and consumer spending together with the need for strategy managers and business leaders to

ensure they are getting the best value for every dollar they spend in their marketing and sales channels.

We also take a quick look at 6 different industries in “the good, the bad and the ugly”

Stephen F Hinch Director Roy Morgan Consulting


Australia

As we will see for Australia as well as the United States and China, many economists and analysts seem to have it all wrong with their assumptions of the length and depth of this

current downturn.

Labour markets are an integral part of social and economic cycles and an interesting fact on social cycles is that they generally follow a definable pattern, and through analysis of the long term pattern of the unemployment rate in Australia we can see just where we are heading.

There is no need for guess work, as in looking at the high points and low points of each cycle in this long term pattern, an analysis shows that there is an average of nine years between each peak point and bottom of the cycle. However as unemployment has been trending down

since 1992 – the last peak - we are now looking at an 18 year period between the last low point of December 1989 and this current low point – and of course that is simply two nine year cycles, so the pattern holds true, but the outcome could be more stressful.

Analysis of the labour market cycle also shows that the average period from the bottom to the peak in the cycle is just

two and a half years, so this suggests that the next upturn in the unemployment cycle will peak around August or September 2010 as that is two

and half years since the current low point.

The next peak in unemployment will not be as bad as many analysts suggest and

will probably be around 6.5% to 7.0%, this is very much in line with the OECD & IMF who have also forecast

unemployment peaking in this range in late 2010.

Just how many people will lose their jobs?

While there has been a lot of discussion on mass unemployment happening, with some analysts or commentators suggesting unemployment will run as high as eight percent, nine percent or even ten percent, there is no real basis for these forecasts, but it does sell more

newspapers. The decreasing demand does suggest there will be less need for manpower in the near term, so fewer jobs will be on offer, and people will lose their jobs. The analysis of long term cycles and subsequent forecast, projects that if unemployment peaks at 6.5%, another 230,553 people will lose their jobs between now and the last quarter of 2010, and this is of

course assuming that the participation rates stay at similar levels as they are today.

If labour markets and the unemployment rate in particular are lagging indicators as most economists and business analysts believe, then this trend and cycle analysis is projecting the unemployment rate to peak around September 2010, which would suggest the economic

downturn will bottom about six months prior to that, giving Australia a very short 18 month slowdown, so in this respect many commentators are correct.


Monthly Consumer Confidence

99.75

133.2

124.8

130.4

103.6105.4

101.2

80

90

100

110

120

130

140

Jan-0

0

Apr-00

Jul-0

0

Oct

-00

Jan-0

1

Apr-01

Jul-0

1

Oct

-01

Jan-0

2

Apr-02

Jul-0

2

Oct

-02

Jan-0

3

Apr-03

Jul-0

3

Oct

-03

Jan-0

4

Apr-04

Jul-0

4

Oct

-04

Jan-0

5

Apr-05

Jul-0

5

Oct

-05

Jan-0

6

Apr-06

Jul-0

6

Oct-0

6

Jan-0

7

Apr-07

Jul-0

7

Oct-0

7

Jan-08

Apr-08

Jul-0

8

Oct

-08

Average 2000 to 2008 is 117

It will seem like a recession for many people, even if it’s not.

While this slow down may not become a real recession it will feel like it for all those people

that do lose their jobs, and there is a lot of discussion on just how many that will be. The reason is that the official ABS method of calculating the unemployment rate is the same as that used by all countries in the OECD and is designed more to measure people that are working, or have been looking for a job in the previous four weeks and are ready to start

working within a week if they found a job. This is in order to gauge the economic impact of the participating workforce. This method does therefore miss people that are unemployed and no longer looking for a job, as they are no longer considered to be participating in the workforce.

This difference can be quite significant, but while the official unemployment rate may well be a

good gauge of economic activity, which it is designed to be, it is not a good gauge of the real pain felt in suburban Australia as more and more people are giving up – at least for now.

The most recent ABS for December showed that on a seasonally adjusted basis, the

unemployment rate ticked up from 4.4% to 4.5% with a net loss of just 1,200 jobs. As with any data, you must look for the story, and with this data we can see an underlying shift. Over the past three months, the total number of people employed has decreased by 17,400, yet the total number of people registered as unemployed has only increased by 11,000. The reason for

this is that the labour force has decreased by 6,000 people, that is - the real difference is that these 6,000 unemployed people have simply not been looking for a job – but they are still unemployed. The participation rate is telling the story as a decline from 65.1% to 65.0% is not

insignificant as this also tells us that over the past three months the working age population has increased by a net 17,353, with the majority of that increase coming in December. A continuation of steady net inbound migration (or returning expats) will increase the size of the working age population and two things will happen – if they start looking for work they will

force up the unemployment rate – if they do nothing, they will force down the participation rate. The monthly data is interesting, but the rolling three month data analysis will tell the story for us, meaning corporate strategist need to be on their toes and watch the picture unfold over the next couple of months.

Consumer confidence a key to consumer spending

The small rise in the Roy Morgan

Consumer Confidence rating has been primarily driven by Australians feeling more comfortable about buying major household items. An interesting point to

note in the long term chart of consumer confidence at the left is the current formation that is appearing. The blue circle highlights what trend analysts call

a “double bottom”, as this is a strong indication that the worst is behind us – at least from a consumer confidence perspective.

All indications from this change are that consumer confidence should start to move back above the 101 level on a monthly average in the coming weeks and months and consumers should start to become more relaxed again- just not those 200,000+ people that will lose their jobs.

The good news then is that now 40% of Australians say now is a “good time to buy” major household items while 33% of Australians say now is a “bad time to buy.”


US Unemployment Rate 1948 to 2014

4.6

4.0

5.3

3.5

2.9

7.2

6.1

6.8

8.5

9.7

7.5

6.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1948

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12 Years 10 Years 11 Years 10 Years 11 Years 11 Years

Comparing their family’s financial situation with a year ago, 27% of Australians say their family is “better off” financially than a year ago while 36% of Australians say their family is “worse off.”

Australians are still very worried about the economic situation for the country over the next 12

months, with 46%, expecting “bad times” for Australia, while just 18% of Australians now expect “good times.”

The fact is that the average consumer is generally right, as we saw from the labour market cycles; 2009 will be slow, so smart companies and business leaders will need to think more

strategically about every decision they make and ensure their marketing strategy is clearly linked to business outcomes, based on real data and not just gut feeling. Weekly updates of the Roy Morgan Consumer Confidence Index can be found at www.roymorgan.com.

The United States

The coming year will be the most perilous in modern history for the American economy, the forces at work are unlike the country has seen since the Great Depression and could result in a “lost decade” of anaemic growth such as we have seen in Japan, or could drop into a severe

contraction.

This is a case where many economists and analysts are deluding themselves that the contraction will be short, with many in this camp looking for the signs of recovery by the end

of 2009. We will be sadly mistaken if we do not recognise that this current downturn in the US economy is not going to be a short term head ache, created by normal short term business cycles but in fact is going to exist for as long as five years or until 2013.

Over the past 30 years as with all social cycles the unemployment rate has shown an historic

pattern of traditional cyclical trends as in the example below.

When this long term cyclical trend is analysed and consideration is given to average length of each individual “leg”

of the long term data, it becomes apparent that there is an average 11 years for each cyclical swing or leg.

This analysis suggests that the US is now just half way through the current cyclical leg that will not peak until 2014. The analysis also suggests that this

current upswing in the unemployment rate will reach 7.5% before easing again

for a short period and at that time will swing up again to complete this cycle peaking at around

8% in 2014. This confirms that the situation America faces at the moment is not just a short down turn, but rather a long cycle adjustment that will take considerable time to unwind, suggesting a real recovery will not be in place in America until probably 2012 at the earliest.

For marketers and business analysts, the real issue is that demand will be flat and America will

be lucky to have a flat GDP, but will most likely see a contraction of -0.7% to -1.2% and inflation still running at 2%.

The US economy will shed around 5 million jobs by the time this is all over, with the unemployment rate reaching 8%, which will continue to cause consumer spending to contract

and personal bankruptcies to soar.


Because of this combination of declining household incomes and consumer spending, corporate profits will continue to decline by as much as 20% in both 2009 and 2010, which is why we

may well see the US in a “lost decade” much like Japan. If you want real proof that Zero interest rates do nothing to stimulate output and growth just look at Japan where rates have been close to Zero for many years.

China

We all know that Asian emerging markets and in particular China have long been the worlds most dynamic with GDP growth averaging some 8% for many years now. (It was 13% for the last

reported year) Many analysts have suggested that the demise of the American economy and subsequent impact on imports will have a dramatic effect on China due to massive reductions in their exports to the U.S.

While there will of course be a decline in exports to America, we must remember that GDP in China, is made up of just 8% exports to the U.S. unlike Singapore and Hong Kong with 20% to 30% of GDP coming from US exports. The good news is that the middle class is growing, and local sales of consumer goods is driving GDP and retail sales volume could increase by around 16% in 2009. In fact the National Bureau of Statistics of China Business Climate Survey results in that country showed that the national business climate index (BCI) was 107.0 in the fourth quarter of 2008, a drop of 21.6 points over the third quarter.

The BCI report of information transmission computer service and software industry, and construction stood at 143.8 and 134.3, which slightly declined over the third quarter; that of wholesale and retail trades, social services, accommodation and catering industry, and real-estate industry respectively was 127.2, 112.9, 111.3 and 101.7, down 16.4, 14.1, 7.7 and 17.2 points over the third quarter; that of industry and transport storage and postal industry

stood at 98.5 and 95.2 respectively, which dropped 27.3 and 24.4 points over the third quarter.

Even if consumer demand did slow, there is sufficient budget surplus to allow China to support the economy with a combination of increased

spending and lower taxes. The fact is that China’s money supply as measured by M2 climbed 17.8 percent

over the past 12 months, as the government pumps money into the economy to offset losses created by exports.

Business leaders and marketers alike need to be aware of the subtle shift we

will see in the make-up of GDP growth in China as they will start to shift from a manufacturing driven economy to a services economy, and I suggest that by 2020, services will make up at

least 30% of GDP.

China is not in a hurry, they are on a long slow path to becoming the largest economic power in the world. Current productivity levels require an additional 700,000 new workers for each

1% of GDP growth. For smart marketers this simply suggest that if China grows GDP just 7% in 2009 there will be an additional 4,900,000 new consumers added to the already impressive and growing middle class.

773,412

7.50%

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

workers per 1% GDP GDP Growth

Require 773,412 workers to support 1% GDP

growth

Total workers with 7.5% GDP growth is

5,800,500 in 2009


The Good the Bad and the Ugly in 2009

“The Ugly”

If you’re a business leader in this industry, then you probably already know that the outlook overall is poor, but also depends on which part of the

world you examine. Sales in the US, Japan and Europe will stagnate or continue to shrink, but demand in emerging markets will continue to expand. China, which recently overtook Japan as the worlds second largest car market will

record 8% to 9% growth in 2009. India and Russia will expand at nearly the same rate, and considering the numbers, this may well be enough to stabilise the big three manufacturers. Let’s not forget, that while the US market will remain in meltdown, this market will still remain the worlds largest, accounting for around 25% of total sales in 2009.

If you are working anywhere except the emerging markets, the outlook is poor to downright ugly.

Much of the advertising world will have a very hard 2009, with overall worldwide growth expected to slow to an anaemic 4.3%, but this will be mostly driven by the emerging markets. The global markets share of the BRICs will jump from

27% to 33% in 2009, this also means the APAC region will overtake western Europe in 2009 – 2010 to become the second largest market in the world – China alone will jump from fifth to fourth place. Given that many global media companies are based in the US, this could prove to be a protracted downturn for this sector.

Business leaders in this sector have a lot to be worried about for the next few years, although leaders in some countries are simply responding to a confidence issue

and not a real slow down. The prospects for labour markets around the world look very weak

over the next couple of years in Europe, parts of Asia, and even longer in the US. Unemployment is expected to increase almost everywhere and demand in most countries will come to a halt, if it hasn’t already. The question is then how do you make money in the industry when the sky has fallen in? This is an industry that seems to focus on doing things the

same way and expecting different results, so smart strategists will be able to identify value where others can’t. The US industry is already in a bad way and it is only going to get worse and will last a lot longer than most analysts suggest. This is an industry however that has

opportunities for value creation if you simply know where to look.


The Good the Bad and the Ugly in 2009

“The Good”

2009 is not all bad news, and there are industry sectors that will thrive, so if you’re a strategist in these fields you need to make the most of the

opportunities. The global travel and tourism business will post the sixth consecutive year of growth in 2009, but only just and despite the economy. High energy prices, climbing air fares and a slowdown in consumer spending in the

United States and much of Europe will take their toll. Global tourist arrivals will increase a rather slow 2.7% and spending on hotels and restaurants should increase by 3.5%. There are going to be some big winners and losers in 2009, with France still the world’s most popular destination with around 83 million visitors. For the first time China will rank as the worlds

second favourite destination, with a projected 65 million visitors, pushing Spain into third place with 62 million. The United States will hold on to fourth place with 57 million visitors, but will easily outstrip all rivals with a projected US$110 billion in international tourism receipts in 2009. Something for struggling tourism bodies to consider is that the largest numbers of globe

trotters come from Germany, followed by the US and then the UK, all countries in recession. A major issue that will face markets such as Australia is the distance of travel requiring time and expense to make the journey. The other big issue Australia faces is the lack of a defined value

position that provides a clear reason to make the long journey down under at what is normally a considerable cost increase compared to other destinations – but that’s another story.

The global financial crisis does not change the

fundamentals of society, the population continues to age and today the average life expectancy of women is 75 years and for men it

is 70 years. Global health care spending will expand in 2009, as longer living consumers place

a premium on quality of life products and services. In the developing markets of China and India, the ranks of the middle class will increase the global demand for health care products,

pushing prices in the more mature markets such as Australia and the United States. Health care spending per head will increase an average of 4% globally, and although many governments around the world have launched anti-obesity campaigns, they may have come too late.

Demand for oil in the rich world will probably shrink in 2009 by around 1% because of slower economic

output. The emerging markets will continue to demand more, but growth will slow to around

3.75%, with net global consumption increasing by just 0.5% to 0.7%. This simply means that for the industry, the outlook is very good, with oil averaging around US$74 per barrel for Brent

crude. Much to the dislike of those hard at the task of containing global warming, coal consumption should increase also because of the relative cheapness and demands from the two largest coal consuming markets of China and the US.


So Just What Can You Do?

As a business and marketing strategist there are many actions that you can take to ensure that you are able to create value regardless of the conditions you face.

So, just how do you know that you have the right strategy and that you are in fact getting the

best value for every dollar you spend in marketing and sales strategies?

Many companies are looking at ways to cut costs and one of the first places business leaders look is the marketing budget. The reality is though that business can reduce their sales and service costs, increase their revenue per customer, and penetrate underserved segments by

guiding customers to the most appropriate channels. To do so, companies should gain a clear understanding of their channel economics and develop plans to manage relations with their channel partners.

Most companies have some understanding of the volumes and margins of their communications and distribution channels. Few, however, truly know the cost of serving customers in each of them or a channel’s associated customer “quality” – that is the value to the company of products or services purchased through those channels.

Even fewer grasp the economics of specific sales and service activities, such as the cost of generating a lead or response and which channels the customers prefer.

If these are questions that even senior marketers and business strategists are having

problems coming to grips with, how can business leaders who have many more things on their plates to worry about resolve the issue. It is no wonder that in many organisations that the head of marketing is not an integral part of the senior leadership team.

Business can work through these thorny questions in the difficult times ahead, by rethinking

the economics of their business strategy and the links that the marketing strategy has in helping drive real outcomes and not just inputs.

You may well need to reshape your channel architecture, to link to your business strategy and the dynamics of the current economic conditions, to ensure you are providing the right

influencers to shape the attitudes of both your consumers and your sales staff.

While developing a good marketing and business strategy can take a lot of work, the end results should provide your business with a clear focus and measurable outcomes, the main

ingredients to a good marketing strategy include: macro economic and business background research and analysis to provide the base line for your strategy. Starting without this knowledge will get the same results you have always had, so don’t skip this. Then your team can move on to defining consumer markets and scope of opportunity, profile and potential ROI

from the ideal consumer, the most efficient way to reach and interact with the different consumer groups.


Modelling Is Not Just For The Catwalk.

It becomes more important than ever to analyse every dollar you are going to spend and now is the time to be developing forecasting metrics that allow you to identify the potential ROI you can expect for each dollar you are investing.

Providing even basic econometric modelling for meaningful ROI forecasting, is normally out of the grasp of even the average senior marketer of business strategist, so you will probably need to call in the experts for this part at least.

A “good” econometric model should start with the ability to quantify each communications

channel based on the impact value of that channel. In other words you should be able to convert the

communication effect of a 30 second TV spot compared to the value of a magazine insert, or a radio spot or anything else you may use.

If this first stage is executed correctly it will not only save you money, but will assist in determining the ideal

communications channel mix.

Another critical step in developing a reliable econometric model to assist with your forecasting

is the input section that allows you to measure the impact of different “external” values such as economic factors, category factors, price factors, promotions, and in fact almost anything you are

able to measure. When this part is executed with sufficient historical data, it is guaranteed to ensure you

are maximising your ROI on all your activities and not just advertising.

Most clients however do not have any method that allows them to

measure “external” factors on their own business outcomes. If your

company is much like the average, then your metrics are probably based on an internal

“dashboard” and that will not help you make a difference to your real world business outcomes, simply to measure what you probably already know.


Historical data “this is your path finder”

I have stressed many time before to clients, that you will need good historical data, to get an accurate and reliable ROI forecasting model.

In the case of the example used here, we had access to five years of data for this client. This data allowed us to develop the model

which showed that a decrease in the marketing budget of the size the client had suggested, would

create the drop curve in their market presence ( the blue shaded area) and corresponding drop off in sales ( the dotted line)

This is a real market example, so the client details have been removed, but I can tell you that the end result was that the client chose to ignore our advice to “see what would happen” – The

client saw what happened, which was an almost identical fit with the model and six months latter we were brought back in to provide a model showing the “ideal” investment needed to meet their ROI objectives and get them back on track.

If you want to make a real difference to your organisation, I believe the first action you should take is to develop a good ROI model along these lines, as it will allow you to chart a course through whatever the market has to offer and to provide the metrics you need.


About Roy Morgan Consulting:

Roy Morgan Consulting is a division of Roy Morgan Research, Australia’s best known and

longest established market research and public opinion polling company, which was founded in 1941 by Roy Morgan. Since then, Roy Morgan Research has grown and prospered. While originally specializing in public opinion, corporate image and media measurement, the company has expanded to cover all aspects of market research information gathering whether

by personal interviews, the telephone, self-administered or the Internet

Our Vision

We build every engagement as a working partnership in which deep trust and a clear

understanding of objectives and outcomes are developed with our clients that allows them to

achieve their objectives.

Our Consulting Services:

Marketing strategy

Customer insights

Brand strategy

Pricing

Econometric modelling

Marketing investment efficiency and effectiveness

Customer loyalty

Sales and channel management

Communications strategy

Our Industry Coverage:

Automotive Information technology

Fast Food Employment Services

Finance Government

FMCG Utilities

Gambling Travel & Tourism

Insurance Telecommunications

Media Sports

Retail

Contact Information:

Stephen Hinch

Director-Roy Morgan Consulting

230-232 Sussex Street, Sydney. NSW Australia 2000

Email: [email protected]

Office: +61 (0) 2 9021 9111

Cell: +61 (0) 488 495 270