The current state of the global economy is continuing to feel the effects of the hit it took to the Covid-19 pandemic. The current supply chain crisis, reduction in manufacturing in Asia and the political and military tensions are causing many economists to warn of a deepening recession in the coming year. The question is how will all of this impact trade and channel promotion?
In September 1965, Barry McGuire released and performed P.F. Sloan’s “Eve of Destruction,” a popular protest song with the famous lyrics,
“So, you tell me over and over and over again, my friend
You don’t believe we’re on the eve of destruction.”
With all that was going on in the world back then, McGuire’s rant was that, even though the government and ostensibly the media was saying everything was fine, he didn’t believe a word of it!
Today’s world seems no different to many people, and in fact, the anti-war sentiments expressed in McGuire’s lyrics still apply, if not with even more fear and alarm. The economy has sputtered everywhere, and although, once again, the media and the politicians are telling us all is well, the economists are singing a different tune.
For most of the world, the pandemic has subsided, but there are still serious issues with job attendance and sickness in China where much of the supply chain begins, the war in Ukraine, and the tensions in the South China Sea on which a huge percentage of the world’s shipping sails.
Here in the USA, we’ve created a massive problem at our southern border, and it is creating untold chaos and cost across the entire ecosystem here in Texas and across the nation. The well-intended provision of funding to low income people during the pandemic to help with the cost of living in light of closings and shut downs has had unintended consequences of people failing to return to the important jobs in restaurants, small service businesses and retail, where they would earn less than the government handout.
Government spending and the reduction of energy production has exacerbated the problem by generating increased inflation resulting in higher costs of everything. The political discourse seems irrelevant when the consumer is struggling with the rising price of meat, groceries, fuel and clothing.
Everyone feels the pinch, and the search for a good deal has never been more top of mind for the consumer.
In June 2022, I wrote a blog post on the impact of inflation on trade promotion (Take a look). At the October CGT Consumer Goods Sales & Marketing Summit, I had several conversations with attendees who read that blog and wanted to discuss their views on what we can expect in the coming years. Our pricing panel discussed it thoroughly as well. Invariably, the question of historical precedent was raised.
Having created and distributed years of trade promotion survey data, I decided to go back as far as I could to see if there was any correlation between past recessions and reductions in overall trade spend (as a percentage of gross revenue). I was able to reconstruct a timeline that overlayed the average trade spending with the actual gross domestic product results in the USA.
Our history of trade promotion surveying began in 1985, so the comparison begins with our first survey where we asked for the average trade spend as a percentage of gross revenue. Our first results showed trade spending averaged 9.7% of gross revenues in consumer products.
Before getting into the numbers, it is important to know that our data has always been based on the response of consumer products company executives and stakeholders who work directly with TPx functions, processes and execution. Everyone’s input is treated with the highest confidentiality; but even so, many naturally felt that this was sensitive data and opted not to share. That said, our rate of response was in excess of 80% from the early days, and is actually a bit higher today (See the 2022 HPM Survey on Trade Promotion).
What the History Shows
The above chart reflects two lines of data. The first, in blue, charts the US Real GDP from 1980 to the present (End of Q2, 2022, actually). The red figures represent the GDP decline, from its peak to the trough. The second orange line depicts the average trade spend as a percentage of gross revenues. The orange numbers represent the average trade spend percentage of gross revenues for the survey taken during the timeline shown.
The light yellow bars show the period of significant downturns in the GDP even though they might not actually dip below the zero line toward a recession. There are distinct relationships between the lowered GDP and four recessionary periods.
The first was during the last half of 1990 in the first and second quarters of 1991. Saddam Hussein invaded Kuwait which forced the United States, United Kingdom and several other allies to launch Operation Desert Shield in August 1990. After Saddam failed to adhere to United Nations mandates to leave Kuwait, Operation Desert Storm began in January, 1991. The preparation of personnel and materiel for this effort was the largest peacetime military action since WWII.
From the NAPAA survey on trade promotion in 1989 we saw the average trade spend increase to 11.4% of gross revenue. However, from the time of the invasion of Kuwait by Iraq, the stock market dropped and the fear of a potentially long and protracted land war reflected in a dip in the GDP. Although not defined as a recession, note that the next survey on trade promotion, also done by MEDIANET and NAPAA, showed a clear reduction in trade spending of .4%.
However, with the swift and successful conclusion of the war and the rapid return of the troops home, consumers returned to a normal pace of shopping and consumption, and trade spending increased to almost 12% within a year. One key account manager’s comments in the following year’s survey said it all: “The outcome of the war and the immediate swagger in the USA led to a rapid return to normal and an increased level of financial commitment once the oil began to flow from Kuwait again!”
Whether or not that was a huge contributor or not is probably immeasurable, but the one percentage point rise in the percentage of trade spending was seen across all sectors of consumer products included in the survey—both fast-moving consumer goods and non-FMCG product promotion.
The second period of recession came on the heels of the 9-11 attacks and the dot-com busts of the late 1990’s. While the effects were harsh and immediate, the recession covered just 10 months, crossing three quarters from March to November, 2001. However, employment began to show signs of weakening which clearly impacted consumer confidence heading to an eventual high unemployment rate of 6.3% in mid-2003.
Trade promotion spending had increased from the previous recessionary period to a level of 13.5% but showed a rapid drop to 13.1% by the April 2002 TPx survey (HPM). Due to the shallow and brief recessionary period, however, the measured trade promotion spending percentage quickly rose to a high point of14.6% according to the 2006 HPM Survey on Trade Promotion.
The third period now called “The Great Recession” happened as a result of the massive collapse of the housing and mortgage banking industries. It began in December, 2007 and continued through June, 2009. The huge financial bailout by the government was nearly $1.5 trillion which also included a so-called economic stimulus of nearly $800 billion—driving the recession deeper.
The lowest dip in GDP was -5.1% with an average real GDP decrease of 2.54% during the entire period. But perhaps the most negative impact of this recession was in the housing industry where the sub-prime rate collapse cost millions of Americans the opportunity to buy, own and stay in their homes. Unemployment reached a high of 10% in late 2009, even though the economists declared the recession over earlier in June.
During this recession, the average trade promotion spending saw a decrease. However it turned out to be rather modest—dropping from the previous high of 14.6% to 14.4% in the 2009 survey. “We made a conscious decision to keep the promotion funding stable during the recession,” one CFO was quoted as saying in the comments of the survey. Another key account manager for a small appliance manufacturer said that they dropped funding slightly but decreased the wholesale price to stimulate more aggressive savings at retail.
All things considered, the severity of the “Great Recession” seemed to have little effect on the average trade spending percentage.
Now spin forward to recent times with the Covid-19 pandemic. The economic chaos caused by the lockdowns and closings is still affecting us to this day. The pandemic-fueled drop in GDP in 2020 was primarily due to people not working, factories closed and not producing, and the entire global economy at a screeching halt. For the USA, the rising stock market and booming economy of the period just before the March 2020 lockdowns kept the average Real GDP from going even lower than the -3.4% for the year. At one point in the deepest point of the lockdowns, the US economy actually contracted 32.9%.
Shelves were bare of key essentials like paper products, canned foods, breads, pasta and cleaning products. All of those categories had trade promotions pulled out of common sense as there was very little product to ship and inventory. Because shopping became a nightmare of “social distancing” and toilet paper handouts while standing in line, trade promotion was duly impacted.
As of the end of 2020, the HPM survey indicated an average percentage of trade promotion spending to gross revenue of 14.1%, a 2% drop from the previous high in 2018. Based on the HPM 2022 Survey on Trade Promotion, the latest average has moved back up to almost 17%.
As the USA and the world continue to climb out of the pandemic ugliness, the prospect of increased trade spending is highly likely. Between 1950 and 1980, trade spending across all consumer goods categories significantly increased. Since 2000, the increase has been flatter with an increase of about 3.5 percentage points. The increased collaboration and joint alignment of promotional events between trade promotion and marketing could mean more funding to the retail (and ecommerce) channels.
However, that can change overnight if the financial community is right in their assessment that we are likely to see more recession in the next two years due to the flood of printed money into the economy coupled with the drop in US manufacturing and the cost of managing the influx of more than 6 million people over the southern US border.
As we see, there is a clear correlation between recession and trade spending, so no doubt the situation is fluid and highly dependent upon the state of the manufacturing, the supply chain, and some hopefully smart decisions made by government.