Consumers Feel the Pinch

And Madison Avenue wants to know: How do you sell in a recession ?

With the economy in a downward spiral of still uncertain depth, many consumers have decided to cut their losses. The '70s "me" decade, which expired in an orgy of spending last Christmas, has given way to more conservative buying patterns. With good reason. More Americans are unemployed, many others are doing without overtime pay, and inflation has eroded earnings.

The harbingers of serious recession are ominous. Last week the Labor Department announced that real hourly compensation dropped 5.6% during the first quarter. The buying power of the American worker is now lower than at any time since 1972. The Commerce Department's Index of Leading Economic Indicators declined 4.8% in April, the largest monthly drop in the 32 years that the figures have been kept. Unemployment claims in mid-May rose more sharply than during any week since 1967. Productivity fell for the fifth consecutive quarter from January through March, the second longest downturn on record.

Because of the bad case of economic blahs, the Federal Reserve last week lowered the discount rate, the amount it charges on loans to member banks, from 13% to 12%. Meanwhile the prime lending rate that major banks charge continued its free fall, dropping to 14%, down from 20% only nine weeks ago.

Administration officials are having an increasingly difficult time seeing silver linings. Treasury Secretary G. William Miller conceded that the downturn has been "quite steep," but then added that the worst of the recession "may be behind us." Miller's optimism, however, has a weak record. In September he proudly announced that the recession was "half over." At that time it had not even started. But despite the rapidly deteriorating economy, Miller steadfastly insisted last week that the Administration had no plans at present to introduce a tax cut to stimulate business. He said that fighting inflation must continue to be the "No. 1 priority."

No area of business is watching the economic numbers more closely than advertising. Consumers' reluctance to buy is causing nervous fidgeting in a field that has prospered by selling Americans on the convenience of Polaroid cameras, the refreshment of Cokes or the glamour of Cadillacs. Traditionally, advertising budgets are among the first victims of a recession, as companies attempt to cut costs by slowing their promotions. Total advertising expenditures are expected to rise to more than $55 billion this year, which represents a modest 2% gain over 1979. But agencies fear the impact of the economic downturn. Stuart Upson, chairman of Manhattan's Dancer Fitzgerald Sample and outgoing chairman of the American Association of Advertising Agencies, predicts a "rough recession--rough on agencies, its people and profits."

The general case of nerves is evident not only along Madison Avenue but also in the growing regional advertising centers, like Chicago and Los Angeles. Says Paul Haynie, senior vice president of Needham, Harper & Steers in Los Angeles: "Everybody's a little itchy." Potlatch, the San Francisco-based wood products giant, last month suspended its $1.5 million advertising campaign for this year because of the slump in home building.

The most difficult task advertisers now face is to second-guess the mood of U.S. consumers. According to experts. Americans are more pessimistic about the economic outlook than at any time since the bottom of the 1957 recession. Detroit Schoolteacher Josh Leopold and his wife Marilyn, a clerk in a department store, are typical. "We've had to cut back on entertainment," says Leopold. "We just don't go out to dinner or the movies as often as we did. We've also eliminated a book club and decided to just put off painting the inside of the house."

But many advertisers say that they detect a more subtle, almost schizophrenic attitude among consumers. E.E. Norris, executive vice president of the Manhattan ad agency Batten, Barton, Durstine & Osborn, has nicknamed this the "splurge or scrimp" mentality. He argues that today's consumers are willing to spend heavily on goods and services that they value highly either for their ego satisfaction or convenience, such as Gucci shoes or Cuisinarts. But on products that they do not value so much, buyers are cutting corners. The extreme example: the Mercedes owner who wears K Mart clothes. Says Norris: "The consumer would rather have some good life and some bad than no good life at all."

Not everyone agrees. Says Thomas Juster, program director of the University of Michigan's Survey Research Center: "The observable tendency is for cutbacks across the whole spectrum of expenditure."

There are some clear signs of scrimping. Anything that smacks of more value is likely to catch buyers' eyes. Discount stores are even racking up sizable gains as department store profits decline. K Mart's business in the first quarter was up 14% while Sears' grew a meager 1.5%. Sales of so-called no-brand generic products, which can be substituted for their nationally advertised siblings but are packed in plain black-and-white packages, are also on the increase. The plain-marked product often sells for 30% to 50% less than the national brand, and some 14,000 stores now carry no-brand products. A study in Chicago showed that only 3.8% of potato chips but 35% of paper towels sold were generic products. Says J. Walter Thompson U.S. Chairman Burt Manning: "Brands are important when you are dealing with a product you eat."

Consumers will be looking hard for value as the economy continues to slow down. Says Chicago Car Salesman Jose Lescano, 29: "I buy good quality, but I shop carefully." Lescano now buys $25 shirts for $8 at a local discount center, and he and his wife Marie have cut up all their credit cards and eliminated restaurant meals.

Yet at the same time some consumers are willing to spend lavishly on everything from Perrier to Porsches. Spending oases still exist, for example, in conspicuous-consumption California. Ross Gilbert, owner of Beverly Hills Mercedes-Benz, has plenty of customers willing to put down $45,000 for a new 450 SLC. In the first four months of the year, Gilbert sold more than 55 new cars, a record. Says Bijan Pakzad, the owner of a prosperous men's boutique on Rodeo Drive in Beverly Hills, where shirts can cost $180: "The stores that will do well will be the very, very expensive and the very, very cheap."

Not surprisingly, admen tell their clients that spending is just as important today as in better times. For example, they warn against cost-cutting measures that result in cheaper-looking ads. Batten, Barton, Durstine & Osborn claims that years invested in building a product's "quality image" can be wiped out by low-budget advertising. A study published in the January-February issue of the Harvard Business Review, written by Nariman Dhalla, chief economist of J. Walter Thompson, showed that companies that raised ad budgets during the 1973-75 recession "chalked up higher shares in their industries and increased their sales, or at least prevented them from eroding." Concluded Dhalla: "Advertising is more important in win ters of slumps than in summers of easy sales."

At least for now, that message from advertisers is being heard. Kellogg, Montgomery Ward, and Procter & Gamble, three of the heaviest consumer accounts, plan no cutbacks. Kraft cheese is increasing its ad budget by one-third, and Colgate-Palmolive will also spend more this year. Admen are watching nervously, but so far they are still singing happy jingles.

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