Boomer Marketing

Selling to a Recession Resistant Market

Ian Chaston

• Publisher: Routledge
• Year: 2009
• ISBN:
  9781134010042
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Baby boomers (consumers in the 50+ age bracket) are the wealthiest, fastest growing consumer group in the world. Despite this, the vast majority of marketing spend is focused on much younger people.

Recessions always dampen consumer spending, but in the 21st century's first recession, the decline in spending among the younger age group has been amplified by excessive borrowing and collapsing house prices. More so than ever before, the current global recession highlights the need for firms to revise their marketing strategies and practices in order to remain competitive. In this book, Ian Chaston uses original case material to propose strategic solutions that take advantage of the moneyed segments of the maturing boomer market. Key topics covered include:

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• Marketing errors made by UK banks in the current global crisis

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• Market research

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• Customer targeting

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• Marketing strategies and pricing innovation

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• Promotion and distribution

A world first, Boomer Marketing is useful for students of marketing and consumer behaviour and is essential reading for practitioners who understand the need for money-oriented marketing.

Additional lecturer material available at www.routledge.com/9780415489638

1 Financially attractive markets

Generic principles of marketing to financially attractive consumers (FACs)

The coverage of issues in Chapter 1 is designed to illustrate the generic principles of marketing to FACs in relation to:

1. Twenty-first century marketing is concerned with identifying and meeting the needs of consumers with adequate spending power.
2. Mass marketing has become a less appropriate philosophy through which to exploit the opportunities which exist within financially attractive consumer markets.
3. Sustained involvement in mature consumer markets competing on the basis of offering standard products or services will eventually lead to erosion in company profitability.
4. Emerging nation consumer markets are very different from their Western nation equivalents and over the longer term may offer limited, financially viable opportunities to many of the world’s existing multinational corporations.
5. Government data can provide an effective, low cost source of data that can be utilized to identify the nature, scale and expenditure trends within financially attractive consumer markets.
6. Compared with the less fortunate members of society, FACs exhibit a much more diverse range of product and service needs.
7. Compared with the less fortunate members of society, FACs place much strong emphasis on product performance, quality and purchase convenience in their selection of product and service suppliers.
8. Financially attractive consumer market needs can change quite significantly in a relatively short space of time. This requires suppliers to exhibit an entrepreneurial, innovative marketing orientation in order to identify and rapidly respond to indications of an emerging trend shift in these market sectors.

Exploiting demand

During the latter stages of the Industrial Revolution, some major companies achieved a leadership position by moving before their competitors to exploit emerging or changing customer needs. In the USA during the nineteenth century, for example, Sears Roebuck created their mail order catalogue business in response to the growing demand for domestic goods from immigrants settling in new lands west of the Mississippi (Moon 2005). Then as the rate of urbanization began to accelerate, the company began to open a chain of department stores which eventually spanned the entire country. A similar proactive strategy of exploiting demand was illustrated by Henry Ford when he recognized the market potential which existed for an affordable automobile. This led to the creation of the mass production manufacturing philosophy used to produce his revolutionary Model T motor car (Raff 1991).

By the end of the Second World War, the accepted managerial philosophy within major corporations, especially those based in the USA, was that the greatest financial rewards from meeting unsatisfied consumer needs would come from exploiting markets characterized by rising customer numbers, increasing per capita income and preferably, a relatively low level of competition. Over the 20-year period from 1945 to 1965, the outstanding growth rates achieved in consumer markets around the world by major corporations such as Pepsi-Cola, Proctor & Gamble, Unilever, General Foods and Nestlé all demonstrated the validity of this managerial philosophy. Furthermore, as evidenced by firms such as Polaroid and Apple, these markets offered huge opportunities if a company was able to exploit new technology ahead of competition to achieve market leadership (Hamilton 2003).

A very important influence behind the success of these companies during the period immediately following the Second World War was that consumers in America and Western Europe were beginning to enjoy an unprecedented increase in per capita income, falling unemployment levels and a rate of economic growth which permitted Government to fund the provision of free or low cost welfare services across areas such as healthcare and education. Accompanying this period of economic boom was a significant increase in the number of children being born. This population trend led to individuals being born during this period becoming known as ‘baby boomers’ (Stern et al. 1987). Although there is some dispute about exactly which individuals can be considered to be members of the baby boomer generation, most sociologists attribute the label to those persons born between 1946 and 1964.

Academics and marketing practitioners have always been interested in the baby boomers because they were the first generation: (a) where the majority of their parents enjoyed the benefits of secure, well paid, permanent employment and (b) who themselves, were the first ever group in the world to be exposed to television advertising from the day they were born. The massive buying power of households containing baby boomers explains why, even now, many large consumer goods companies still consider their primary target market is the 18–49 year age group (Keller and Kotler 2006).

Sustaining profitability

Once a market moves into maturity, the intensity of competition will often lead to most firms facing declining profitability. The reason for this outcome is that to retain the loyalty of their existing customers in the face of the threat posed by competitors, firms will have to continually increase their level of promotional expenditure. In many cases, this activity is accompanied by either a reduction in unit price or an increase in the level of sales promotion activity. Financial performance is often further weakened because marketers, similar to generals on the Western Front in the First World War, favour the tactic of mounting resource intensive, frontal assaults upon well entrenched competition (Kotler and Singh 1981). The outcome of this strategy is usually a spiralling of promotional expenditure without either party gaining any significant increase in market share. Examples of such events are the brand wars, which regularly break out between firms such as McDonald’s vs. Burger King and Pepsi-Cola vs. Coca-Cola.

The bank wars

Case Aims: To illustrate that there are rarely any real financial benefits to be achieved by companies triggering brand wars in mature markets.

In most cases, the usual outcome of brands entering into head-to-head confrontations in a mature market is that there is rarely any fundamental increase in a company’s total number of customers, but the cost of the war will be reflected in all parties facing a reduction in operating profits (Thompson 1999). The deregulation of the UK financial services sector in the 1980s was eventually to lead exactly to this depressing outcome. Deregulation caused the UK banks to become much more interested in using mass marketing techniques to attract additional business. By the 1990s, some of Britain’s leading High Street banks were engaged in fierce battles to steal each other’s retail customers. In the case of NatWest, having triggered a promotional spending spiral by entering into an unsuccessful battle for market leadership with Barclays, the bank’s weakened financial position was a contributor to the bank eventually being taken over by the Royal Bank of Scotland in 1999. Instead of learning from the NatWest mistake, another brand war broke out between financial institutions seeking to achieve market leadership in the UK consumer mortgage market. The existing traditional UK consumer mortgage model was based upon lending depositors’ money to borrowers who wanted to buy their own home. Essentially, market leadership was based upon being able to attract more consumers to open savings accounts, which in turn then permitted the institution to fund more mortgages than the competition. Then Mr Applegate, then the CEO at Northern Rock, had the apparently brilliant idea of borrowing money in the short-term money markets, where prevailing interest rates were much lower than the rates being paid to savers (Anon 2007). These cheaper funds could then be used to offer mortgages at a lower interest rate than other mortgage lenders in the market. The outcome was that Northern Rock embarked on a battle for market share which saw Mr Applegate being lionised in the financial press for bringing more aggressive, modern thinking into the conservative world of UK banking (Urry 2003). All was going to plan until 2007. Then the sub-prime mortgage disaster in the USA caused banks to become increasingly wary about lending money to each other. Money became scarce and short-term interest rates rose dramatically. This left Northern Rock in the position of being unable to pay off loans that were coming due or to raise additional loans to service the institution’s rising cost of the money market debts which had already been incurred. As word spread about the problem, there was a run on Northern Rock as worried UK consumers rushed to remove their savings. The queues that formed outside Northern Rock, the country’s fifth-biggest mortgage lender, represented the first bank run in Britain since 1866 (Anon 2007). The chancellor Alistair Darling’s attempts to reassure savers seemed to only to lengthen the queues of people outside Northern Rock branches demanding to get their money out of the bank. The run did not stop until Mr Darling gave a taxpayer-backed guarantee that all the existing deposits at Northern Rock were safe. Nevertheless, as the scale of the problem within Northern Rock became known to the UK Treasury and the financial regulators, in the end the only way that the UK Government was able to resolve the situation was to nationalize the bank (Ritson 2007).

The lesson that both senior managers and marketers should learn from such events is that the best response to a brand war is usually to stand back, wait until the dust has settled and then move in to exploit the opportunities created by those firms whose financial position has been weakened. Regretfully it is often the case that the CEOs of one or more of the largest companies perceive a brand war as a personal affront to their reputation and hence seek to become embroiled in the battle. Such was the case with HBOS which was created when Royal Bank of Scotland acquired Halifax, one of the UK’s largest mortgage lenders. The HBOS CEO, Mr Andy Hornby, had established a reputation for being extremely aggressive in his response to any threat from competitors. Hence when it was understood that Northern Rock was achieving market share growth by borrowing short-term funds via the money markets, Mr Hornby’s reaction was to duplicate the model. As a consequence, this decision sparked off a bank war between most of the mortgage lenders in the UK banking system. In mid-September 2008, after a huge collapse in the value of HBOS shares, the only viable solution was for the UK Government to assist the bank to consider a takeover offer from the more conservatively managed Lloyds TSB. Explaining the demise of HBOS, Mr Hornby was quoted as stating ‘we found ourselves impacted by the wholesale market shutting down. We were particularly dependent upon wholesale funding’ (Anon 2008). This was not a particularly surprising statement given that HBOS in their fight to retain market domination had by September 2008 created a lending gap of almost £200 billion between the bank’s mortgage assets and liabilities.

Eventually in most market sectors, leading firms tend to accept that brand wars are of little benefit and begin to seek alternative ways of sustaining profitability. In most large organizations, the preference of senior managers is to rely on marketing practices which have been important in delivering success in the past (Zajac and Shortell 1989). Thus, when major brands perceive their older, well established markets have entered maturity, many decide to ‘follow the money’ by attempting to identify new markets exhibiting evidence of higher, future potential consumer spending. The corporate memories of the golden years of mass marketing in Western nation economies caused many large companies to favour markets where there were indications of increasing numbers of middle-class people in the 18–49 age group who are expected to enjoy rising per capita incomes over time.

Hence in the 1990s, following the advent of perestroika and demolition of the Berlin Wall, the popular, preferred market option was Russia. Unfortunately, the cultural conditions were not that which Western managers had expected following the collapse of a communist state. They assumed democratization would lead to the emergence of a free market. Instead, organized crime, in many cases working alongside the old communist party bosses, created an environment similar to that which had prevailed in places such as Chicago, USA, during prohibition (O’Connor 1993). The situation further worsened following the election of President Putin because he instigated a Government policy of severely restricting the activities of foreign corporations. In some cases this has led to contracts being arbitrarily cancelled and even assets repossessed. As a result, companies such as BP and brands such as McDonald’s have failed to achieve the scale of financial reward in Russia to which they originally aspired.

Russian risks

Case Aims: To illustrate the uncertainty and risks associated with Western firms seeking to achieve ongoing revenue growth by entering the Russian market.

In a review of the lessons learned concerning Russia’s response to the entry of foreign firms since the collapse of the Soviet Union at the beginning of the 1990s, Schlevogt (2000) has proposed there are number of sociopolitical factors which can lead to adverse outcomes for foreign investors. He notes that the election of President Putin with his KGB background and the support he has received from the army has resulted in the re-building of a powerful autocratic system that intends to re-assert the nation’s sovereignty. One likely outcome is that over the long term, Russians will, where possible, try to avoid having to rely on overseas firms, continuing to operate inside the country. The country’s approach to privatization, which in theory was designed to achieve democratization of the Russian economy, has led to a small number of individuals known as the oligarchs who, with their close links to Government officials and politicians, were able to gain control of huge industrial operations at extremely favourable prices. As well as making huge ‘paper profits’ on their acquisitions, these oligarchs have apparently also been successful in avoiding paying significant amounts of tax on their trading profits. In terms of foreign firms seeking to survive in this environment, Schlevogt points out that:

Foreign investment regulations often are confusing and contradictory. Government officials at all levels change frequently and are often inexperienced. Property rights remain unclear … And law enforcement is highly unreliable. The Mafia often fills this vacuum with its own laws.

[He concludes that:]

… the political situation reminds me very much of the ill-fated Weimar Republic in Germany in the 1920s.

A stark illustration of how an essentially authoritarian regime can determine the fortunes of even large internal corporations is provided by the project to exploit the huge energy deposits on Sakhalin Island on Russia’s Pacific sea coast (Lustgarten 2007). In 1996 when Western firms were still optimistic that democratization was creating a free market economy in Russia, and oil was trading at $22 a barrel, Royal Dutch Shell signed a contract that gave the Shell-controlled Sakhalin Energy Investment Corporation the rights to recoup all costs plus achieve a 17.5 per cent rate of return on the investment before Russia would start receiving revenue from oil being pumped from the fields in the region. Unfortunately, Shell does seem to have made some major mistakes in terms of a poor safety record, a failure to meet expectations about infrastructure improvements and damaging the local environment. Shell also encountered technical problems and apparent reversals of opinion by Russia’s Natural Resources Ministry which led to a doubling in the estimated costs of bringing the Sakhalin fields on stream. To compound Shell’s problems, however, the rapid rise in world oil prices led to a shift in political thinking about permitting foreign ownership of energy reserves in Russia. This meant Shell’s days of remaining in control were clearly numbered. Hence, few industry observers were surprised when in 2006, Shell was forced to sell their controlling interest in the Sakhalin project for $20 billion to the huge, state owned, Gazprom organization.

A common outcome of disappointing business performance in Russia was that many multinationals switched their attentions to the consumer markets which are emerging in China and India. Here again, although firms were initially welcomed with open arms, once economic growth has been established, their respective Governments have acted to avoid their economies becoming dominated by foreign investors (Atkinson 2004). Furthermore, in the case of China, it has repeatedly been demonstrated by the behaviour of this country’s various authoritarian rulers over the past 300 years, the nation’s philosophy is orientated towards the perspective that once their domestic firms have acquired the necessary skills to operate effectively in a specific industrial sector, the ongoing presence of foreign companies will no longer be looked upon with favour.

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Table of contents

• Cover Page
• Title Page
• Copyright Page
• List of figures and tables
• Preface
• 1 Financially attractive markets
• 2 Opportunity research
• 3 Market assessment
• 4 Internal capability
• 5 Customer identification
• 6 Strategy
• 7 Innovation
• 8 Promotion
• 9 Pricing and distribution
• 10 Health and beauty
• 11 B2B marketing
• 12 Twenty-first century ‘Es’