EFFECT OF RECESSION ON CONSUMERS AND APPAREL INDUSTRY

SUBMITTED BY ARUNIMA SHARMA IN PARTIAL FULLFILLMENT FOR THE DEGREE OF M.A. IN FASHION MARKETING 2011-2013
SUBMITTED TO-NANDITA ABRAHAM 7TH NOVEMBER 2011

PEARL ACADEMY OF FASHION NEW DELHI

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INTRODUCTION The topic of my review essay is Effect of Recession on Consumer Buying Behaviour and Apparel Industry. Over the years a lot of discussion and research had been done on recession and the impact of recession, how and why recession arises and how it effects the entire world. This paper is an attempt to review various reports and researches done in the area of the impact of recession on the apparel industry and on the consumers behaviour and to have a better understanding of recession. In my review essay I would be reviewing: What is recession- understanding what recession is and its definitions. Effect of Recession on other Industries- the various effects that recession has on industries worldwide. Effect of Recession on Consumers- how does recession affect the consumers and what all problems they face. Success tactics during Economic Decline- what tactics are implied by business man that improved strategic viability during recession. Effect of recession on Apparel Industry- understanding how recession affected the apparel market globally, what were the strategies applied during recession, effect on supply and demand side.

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TABLE OF CONTENTS S.NO 1 RECESSION 2 3 What is Recession EFFECT OF RECESSION ON OTHER INDUSTRIES Countercyclical industries/Noncyclical industries 7-8 5-6 PARTICULARS PAGE NO. 3-4

EFFECT OF RECESSION ON CONSUMERS Businesses Reduce Workforce Increased Cost Of Living Credit Debt And The Recession Commodity Prices Budget Cuts Customer Value Seeking Consumer Spending Down

REVIEW OF RESEARCH ON SUCCESS TACTICS DURING ECONOMIC DECLINE Retrenchment Tightening Credit Maintaining Advertising Budget Increasing Liquidity Reducing Debt Deferring Capital Expenditures Pursuing Selective Growth

9-10

EFFECT OF RECESSION ON APPAREL INDUSTRY Impact of 2009 Recession on Global Fashion Industry Strategies adopted by Fashion Industry during 2009 Recesiion 2008-09

11-12

THE RECESSIONARY IMPACT ON 2010 AND FORWARD

15-16

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Supply Side Demand Side CONCLUSION 17

BIBLIOGRAPHY

18

RECESSION What is Recession? The National Bureau of Economic Research (NBER) defines recession as "a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." () Recession in a simplified version People spend lots of money thus getting into debt. Government needs people to stop spending money, because inflation goes up. Interest rate rises to stop people from spending so much money. The price of all goods and commodities rises. People cant afford to pay off debts or buy products. When economic crisis reach such a stage its known as Recession. As recession hits the people everyone stops spending money and start saving up, the economy slowly recovers and people gradually start spending again. And thus, the cycle slowly starts again. Percent of GDP

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Source: Fiscal Monitor, IMF, November 2010 A recession is a period of slow or negative economic growth, usually accompanied by rising unemployment. Economists have two more precise definitions of a recession: (1) Two consecutive quarters of falling GDP (gross domestic product), which can be readily ascertained from Department of Commerce statistics; or (2) a time interval when an economy is growing at less than its long-term trend rate of growth and has spare capacity. The latter definition is operationally much harder to prove. Recessions end when the economy recovers, which can be defined as a quarter or more of GDP growth, a quarter or more of increase in stock market indices, or a quarter or more of decline in the unemployment rate. Other economic measures, such as wage rates, inflation, and balance of payments, can also be employed in determining whether a recession exists, and when it ends. Savings and Investments in the Global Economy Savings Countries USA UK 2001 16,4 15,4 2008 11,9 15,1 59 32,1 26,7 25,7 50,8 24,2 Investment 2001 19,1 17,4 36,3 24,2 24,8 19,5 24,8 21,5 2008 17,5 16,8 49 30,1 23,5 19,3 26,7 23,9

China 37,6 Emerging economies in 27,6 Asia Japan Germany Oil exporting countries World 26,9 19,5 33,3 21,4

Source: BIS (2009) and IMF (2009) Average change in growth rates Average change in growth rates (2008-2009 minus 2005-2007) GDP Eastern Europe CIS Industrial countries -7,8 -7,3 -4,6 Consumption -8,7 -6,6 -3,4 Investment -25,6 -25,2 -15,3 Exports -13 -6,8 -10,8

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Western Hemisphere Emerging Asia Africa Middle East

-3,7 -3,1 -1,9 -1,4

-4,3 -1 1,8 -0,7

-11,8 -11,8 0,9 -2,7

-7,5 -7,6 -4,1 -8,2

Airlines also suffer from the decrease in consumer spending and turn to price wars to maintain passenger volume. Eg.- in early 1991, American airline cute farres in all routes, both domestic and foreign, escalating a round of discounts in the industry designed to lure travellers back into the air after months of slow traffic due to recession/ Source: Lane and Milesi-Ferretti (2010)

Real estate lending was the biggest single category of business for commercial banks and became the major source of financial weakness for the banking industry during recession. Comprising 25% of the industrys loans, the commercial real estate market became the largest problem loan category.

EFFECT OF RECESSION ON OTHER INDUSTRIES In a recession a cyclical industry is characterized by stable or falling prices, a decrease in corporate spending, a decline in real earnings, excess production capabilities, and high unemployment. The economy produces less than its capacity.

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COUNTER-CYCLICAL INDUSTRIES
An industry tht does well during recession is a counter cyclical industry. They perform well in a recession because they provide consumer with cost savings on a necessity product. Therefore, generic products and discount warehouses improve their profit performance as consumers seek to save money on necessary purchases.

NONCYCLICAL INDUSTRIES
Its performance is unrelated to the state of economy. During a recession, consumers will continue their expenditures on necessity products. Many health-care products are unaffected by recession because consumers insensitivity to the cost of their care and consumers concern for being health conscious.

() Recessions Roll

Recessions tend to work their way through an economy, from one region to another and from one industry to another. During the first six months of 1991, every major industry group reported increases in business failures, compared with the same period in 1990 - but the industry declines had different starting points, different rates of decline, and different recovery patterns. Bankruptcies of firms drove the surge in retail and service failures across the United States mainly providing services to businesses. In addition, failures in the finance, insurance and real estate sectors soared. The depressed real estate market combined with the impact of the Savings and Loan crisis to sharply increase the failures in these industries throughout the United States. In turn, the depressed real estate and finance industries continued to drag down the construction industry in most regions.()

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EFFECT OF RECESSION ON CONSUMERS An organization's success or failure depends on how well it markets its products and services. In times of recession, firms find it difficult to market their products. Recession is a temporary economic downturn that leads to reduced trade and industrial productivity. Other effects include increased inflation, reduction in consumer spending power, job losses and rising unemployment rates. When recession hits a nation it affects every kind of consumer in many ways. Their cost of living reduces, there spending and buying capacity goes down, people suffer job loss, unemployment rises thus leading to many day to day calamities. Below are stated certain effects of recession on consumers: Businesses Reduce Workforce When economic activity slows down, businesses begin to shake, and in an attempt to remain profitable business cut down their expenses. one method of cutting expenses during a recession is to reduce the workforce. The employees lucky enough to keep their jobs spend less money as they fear losing their jobs too. This further exacerbates recession.

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Increased Cost Of Living During recession consumers face a tough time fulfilling all their needs due to lack of income. We all our well aware of the rising costs of fuel, food and basic daily items which during a recession cause consumers further difficulties. When consumers spend increased portions of their monthly budget on necessities such as food, fuel and gas, it leaves them less money to pour into the economy to help offset an economic slowdown. With the prices of daily necessities rising consumers tend to switch to other alternatives. Credit Debt and the Recession Recession sends consumers into heavy debts with little to no savings. As a result consumers try to hold on to whatever money they have. Some consumers severely cut back on credit card spending while others cannot afford to pay their monthly credit card bills. The reduced spending and defaulting on credit card agreements not only affects the consumer, it adds to the financial burden banks face during a time of recession. With no money left in pocket and no money left in bank the consumer if left helpless reducing their buying capacity to 0. Banking Problems A downturn in the housing market, coupled with unchecked bank lending practices, can contribute to an increase in home foreclosures. Consumers find themselves owning homes that were worth less than the outstanding mortgage loan. When theyre unable to sell the home and pay off the outstanding mortgage, some consumers allow the bank to foreclose on the home, leaving the banks with a large inventory of foreclosed homes that are worth less than the amount of the outstanding mortgage. The housing market often favours buyers during a downturn, yet consumers have a hard time getting financing. Consumer Spending Down While it is understandable that consumers need to hold onto the money they have during a recession, the longer consumer spending is down, the longer and deeper a recession lasts. Budget Cuts Many organizations cut down their budgets and reduce the scale of their operations in order to minimize costs. The reduced demand for such goods during recession results in slowdown in production. This results in budget cuts for the marketing department. Customer Value Seeking During recession, the amount of disposable income available to consumers is low. This in turn leads to reduced spending power. At this point, consumers buy only those products that offer them real value for their money. This means that consumers will only buy what is necessary at a time. Therefore, firms are forced to produce quality goods. Commodity Prices During recession, product prices tend to increase. This is brought about by high cost of the factors of production. The additional cost is then passed on to the final consumer. Some consumers will look for cheaper substitute products. Others will stop buying the products completely. Thus the consumers have difficulty in finding

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commodities according to their requirements in return reducing their buying behaviour. ()

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REVIEW OF RESEARCH ON SUCCESS TACTICS DURING ECONOMIC DECLINE Having roughly determined the extent to which their firm is vulnerable to recessionary impacts, given the cyclicality of its industry, the economic health of its region, and the vitality of its suppliers and customers, entrepreneurial executives will want to consider eight tactics that improved strategic viability for businesses in the last recession. These success tactics include:
The main goal of retrenchment is to stabilize a companys financially during the economic downturn so that it can be in position to recover from the recession. Retrenchment tactics are often the front half of a cut and build strategy in which the company cuts certain expenses and invests the savings in new priorities.()

The entrepreneurs believed that loosening credit might bootsales, but they come at the expense of liquidity if the debt sours. They modified their target markets, and increased their segmentation efforts as ways to escape recessionary declines. The more focused the appeal of their product. The less likely the companies thought that general downturns hurt them. Managers also reported altering the marketing budget, using more sales promotion, but not increasing advertising. ().

RETRENCHMENT

TIGHTNING CREDIT

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Lower debt can reduce cash demands through smaller interest payments. Lowering debts decreases cash and this the companys flexibility. Lines of credit can also be revoked when paid-pff, at times because of the banks portfolio of loans rather than the condition of the company. MAINTAINING ADVERTISING BUDGETS Reducing capital expenditures increases both available cash and the productivity of existing investment. Delaying capital expenditures enables the firm to get more from existing facilities at a time when consumer a may be more concerned with price than technological innovation.

INCREASING LIQUIDITY

REDUCING DEBT

When faced with recession companies are tempted to reduce advertising expenditures. However other entrepreneurs have found that recessions are good times to maintain advertising budgets().A recession study by the strategic planning institute conclude that the companies that fared best in the 2 years after recessions had either held steady in advertising expenditures or made moderate cuts during the recession()..

The liquidity and flexibility of a company are increased when inventory levels and accounts receivables are reduced. Liquidity provides stayingpower in a recession. DEFERRING CAPITAL EXPENDITURES

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PURSUING SELECTIVE GROWTH

().

The risks associated with activating an aggressive growth strategy during a recession are high if the financial reserves of a film of a firm are limited and its cash flow is strained. On the other hand, the cost of pursuing selective new opportunities is low since many competitors are sitting in wait for an economic recovery.

EFFECT OF RECESSION ON APPAREL INDUSTRY The whole world undergoes recession. The economy slows down, the business environment is becomes unpredictable and the consumers get increasingly diverse, informed, technologically strong and demanding. The global meltdown has, in no way, spared the fashion industry over the past years. This industry, along with other textile products industry, also feels the pinch of financial adversity. This industry consists of diverse professionals and companies-modelling, fashion-designing, retailing, marketing, planning, and distribution. There are brands and local sellers too, all struggling with their products for survival. All of them feel the impact of recession in different ways but what is similar among all is their narrowing wallets.

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Quarterly changes in percent calculated as an annual rate

Source:()

Impact of 2009 Recession on Global Fashion Industry The trend all over the world is that of rising unemployment, credit squeeze and plummeting home budgets. Lavish spending habits have been replaced by very cautious closefisted consumer. One of the few items on which the consumers cut back in tough times include apparels and fashion accessories. In the last recession, various companies worldwide where filed for bankruptcy. Many big names in the fashion industry faced financial problems, many of whom even declared negative condition. Many companies negotiated a partnership deal with willing investors in order to help their finances. Announcement of plans to remove jobs in regional offices became more common news. Many events, innovative plans were cancelled. Many fashion labels in fashion hubs like Italy, held emergency talks with government and appealed to support their industry or atleast lessen the effects of their financial slowdown. Many fashion houses dint show their collections for fall 2009 due in the season as shows costed them thousands of dollars with no guarantee of return. Many designers set the trend of smaller or more reserved shows to cut down on budget. Designs also seemed to be affected by the crisis as many seasons during the 2009 recession featured only quiet colours and minimalist lines.

Strategies adopted by Fashion Industry during 2009 Recession Consumer spending reduced due to pressure on retailers margins. Therefore businesses focused on protecting gross margin in ways of loss prevention, price optimization and efficient inventory management systems. Consumers were provided with consistent brand and services through multiple touch points-stores, online, social commerce sites, blogs, mobiles etc. Value added services such as buy online, return at stores etc. helped establish brand loyalty among customers which became the success mantra for survival. Usage of social media channels increased and was very effective to reach consumers for promotion and brand loyalty.

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A strong brand identity was crucial for international success as stronger brands would be able to take advantage of their brand strength for global expansion using alliances and franchise arrangements. Sustainability, reduced carbon footprint, eco-friendly fashion and green supply chain became more prevalent terms. Brands which genuinely committed to enivornmental cause were rewarded. (().

Before the current recession, the last global financial crisis was the Great Depression. What we have seen over the months was devastating, leaving many individuals, companies, and even countries on the economic edge. The apparel industry, one of the largest employers of skilled labor, had suffered more than most. The long-term impact of the 2008/2009 recession remains to be determined but it is unlikely there will be any quick return to the go-go years of the past decade. 2008/2009 The current economic recession started early in 2008 and gained strength throughout the year. The year concluded with a dismal Christmas, destroying retail confidence and buying patterns in 2009. For some fashion retailers, if 4th quarter sales are down, the year is a disaster. In the past two years there were over 6,000 retail store closures in the US, more than 2,000 were apparel retailers. Many large apparel retailers closed unprofitable stores such as Macys and Gap. Other companies such as Goodys, Steve and Barrys, Gottschalks , Saks Club Libby Lu disappeared entirely. In 2009, U.S. clothing imports worldwide dropped about 13% compared with 2008. Consumers slowed their purchases and retailers reacted even more drastically by delaying or cancelling orders to factories. As retailers and brands began delaying and cancelling orders in 2008/2009, the CAFTA-DR region suffered greatly. This seems to defy logic, which instinctively says cancel the larger, long-lead time, orders and focus on suppliers in the region. Looking at the total percentage of US garment imports from various regions for the period YTD October 2008 versus YTD October 2009, we find that China increase their market share

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in both unit percentage (36.9% to 40.9%) and value percentage (35.5% to 38.0%). South Asia increased from 14.8% to 15.4% in units and from 13.2% to 14.1% in value. CAFTA-DR and Mexico declined during the same period from 19.5% to 16.1% in units and from 16.1% to 14.9% in value.
Geographic Area China South Asia CAFTA-DR & Mxico YTD OCT 2008 market Share unit % 36.9% 14.8% 19.5% YTD OCT 2009 market share unit % 40.9% 15.4% 16.1% YTD OCT YTD OCT 2008 value 2009 value % % 35.5% 13.2% 16.1% 38% 14.1% 14.9%

() Although there were certainly many companies that were losers during the 2008/2009 recession, there were some companies that found ways to fight the tide and grow their business. To illustrate this phenomenon we selected 19 well-known U.S. retailers and brands and 4 well-known European ones to illustrate their strength or weakness during the 2008/2009 period with the larger of the selected apparel retailers viewed alongside some of their international competitors.()

Net Income/Loss comparisons reveal other interesting changes between the last 2 fiscal years at some of these leading retailers.

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()

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THE RECESSIONARY IMPACT ON 2010 AND FORWARD Few impacts that the 2008-09 recession had areLooking at January 2010 sales results in the US market, most of the major chain stores, from high-end to discounters posted better results than a year ago. Luxury stores like Neiman-Marcus (comps up 4.5%) and Saks (comps up 7%), who were among the retailers hurt most by the recession, posted strong January results. Popular stores and chains such as Macys, Aropostale and GAP raised their earnings forecasts after reporting increased January sales results. The online apparel market and marketing through Web 2.0 technology continues to gain popularity with consumers. Ebay sold $1.7 billion worth of apparel last year, making it the largest online vendor in the industry and the one with the least amount of inventory ($0). Selling direct to consumers gives retailers a chance to test merchandise and purchase for a greater sell through rate. For some, with suppliers close by, this could even mean making to order.()

Supply Side In India, the rupee depreciated (foreign currency appreciated) because of the capital outflows during recession that ensued the GEC. This means exports should have increased but as described later, export channel was blocked due to the lack of demand in the international market and the protectionist tendencies of EU and US. The only other effect increase in cost of imports- that can be in force, drove up the import bill. The profit-motive of the entrepreneurs guided them to lower investments (UNCTAD 2009). This was again enforced by loss of FDI to Indian Industry (The Financial Express, 17 December 2008). As investments in the industry went down, output was cut, restraining our growth. With sluggish growth, it is difficult for employment level to remain stable or shoot up.() Demand side The textile has seen a steady fall in industrial output since the beginning of the recession.Since June 2008 average IIP for Textiles and Textile products has witnessed a decline inmajority of months with an average month-on-month drop of 1.44% from June 2008 to February 2009 indicating a drop in production (CITI, June 2009). According to provisional Data (CITI, June 2009), cotton textiles registered a negative y-o-y growth of -2.1%, while for textile products (including RMG) this number was -0.2 for the year 2008-09. For Manmade Fibres this figure was relatively very high, etched at -14.7%. (CITI,June 2009).While the ratio analysis does not point to a definite positive linkage between exports and employment, comparing 1998-99 and 2006-07, we find an explicit overall increase in employment per unit export. Thus, in recent times employment has shown a greater dependency on exports. However, as said earlier, this does not represent a trend. From the quantitative analysis, we find that exports do not have a significant effect on employment. While the effect is seen to be positive over the period considered, there is no evidence of a very strong linkage because even values are statistically significant elasticity values are low.The last aspect of our framework, the fall in domestic demand on account of fall in incomes and its consequent impact on employment has not been analyzed in great detail in this study. Nonetheless, the very fact that a fall in output has a significant negative effect on

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employment levels goes on to indicate that if there were to be a fall in domestic demand, it will have serious consequences for employment. ()
EMPLOYMENT

DEMAND SIDE

SUPPLY SIDE

EXPORTS

DECELERATING GROWTH

COST OF IMPORTED GOODS

INVESTMENT

FALL IN EXPORT DEMAND

Source-()

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CONCLUSION After reviewing a handful of journals and articles on recession, I have come to the understanding of why a recession is caused and how it arises in the first place. The various effects that recession has on the entire global market and on all the industries. How people lose their jobs and that affects their entire buying capacity. How the nations supply side and demand side is affected. Recession not only affects a certain class, but in fact it affects each and every person in the country. What all repercussions a recession has and the measures taken by businessmans, by families and people worldwide to save themselves from severe effects of recession. The loses that the apparel industry undergoes through and how they try to survive during a recession. The gaps that I found while reviewing my topic were that there was not much statistical data available online showing proofs of recession and more information is required on the effects that the recession had on Indian apparel industry. There is not much information available online on the measures that sellers take to save their businesses, its very limited and I think these areas could use more research.

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BIBLIOGRAPHY

Global Recession Impacts on Fashion Industry:Strategies for Survival. TE. Amadeo, K. (2011, june 30). Retrieved 2011, from About.com guide: http://useconomy.about.com/od/glossary/g/recession.htm Goel, S. R. (2009). The Global Economic Crisis, Growth and Employment: The case of indian textile and apparel industry. LaForey, C. (n.d.). how does recession affect a consumers? Retrieved 2011, from eHOW: http://www.ehow.com/how-does_4586050_recession-affectconsumers.html Pearce, J. A. (01.01.2002). Business tactics for confronting economic recession and planning for recovery. Economic Growth. Report, T. D. (january 2009). the david bimbaun report. Sanjay Raj Singh, S. G. (n.d.). The Global Economic Crisis, Growth and Employment: The Case of Indian Textile and Apparel Industry. Singhl, S. R., & goel, S. (n.d.). The Global Economic Crisis, Growth and Employment: The Case of Indian Textile and Apparel Industry. Update, W. (January 2011). IMF. Walter T. Wilhelm. (2010). The Impact of Change: 2008-2010 and Beyond for the Apparel Market.