Weathering Tight Economic Times: The Sales Evolution of Consumer Durables Over the Business Cycle

Abstract

Despite their obvious importance, not much marketing research focuses on how business-cycle fluctuations affect individual companies and/or industries. Often, one only has aggregate information on the state of the national economy, even though cyclical contractions and expansions need not have an equal impact on every industry, nor on all firms in that industry. Using recent time-series developments, we introduce various measures to quantify the extent and nature of business-cycle fluctuations in sales. Specifically, we discuss the concept of cyclical volatility, and derive a dynamic comovement elasticity between the economy as a whole and the cyclical fluctuations in various performance series. To further enhance our understanding of how consumers adjust their purchasing behavior across different phases of the business cycle, two other notable features related, respectively, to the relative size of the peaks and troughs and the rate of change in upward and downward parts of the cycle, are explicitly considered. Of specific interest in this respect are the notion of deepness and steepness asymmetry. We apply these concepts to a broad set (24) of consumer durables, for which we analyze the cyclical sensitivity in their sales evolution. In that way, we (i) derive a novel set of empirical generalizations, and (ii) test different marketing theory-based hypotheses on the underlying drivers of cyclical sensitivity. Consumer durables are found to be more sensitive to business-cycle fluctuations than the general economic activity, as expressed in an average cyclical volatility of more than four times the one in GNP, and an average dynamic comovement elasticity in excess of 2. This observation calls for an explicit consideration of cyclical variation in durable sales. Interestingly, the combined evidence across all durables suggests that asymmetry is present in the speed of up- and downward movements, as durable sales fall much quicker during contractions than they recover during economic expansions. Finally, key variables related to the industry’s pricing activities, the nature of the durable (convenience vs. leisure), and the stage in a product’s life cycle tend to moderate the extent of cyclical sensitivity in durable sales patterns. Copyright Springer Science+Business Media, Inc. 2004business cycles, sales evolution, consumer durables, time-series econometrics,

Business cycle research in marketing: a review and research agenda

“…Asymmetric nature Apart from the size and direction of the BC fluctuations in performance, a number of studies in this research stream have documented asymmetries between upand downward movements in category or industry performance. This is observed in durable sales by Deleersnyder et al (2004), but also private-label performance (Lamey et al 2007) exhibits cyclical up-and downward movements that are not mirror images. In tourism, Dekimpe et al (2016) examined, but could not find, such asymmetries across alternative BC phases.…”

“…Asymmetries can occur in both the speed and depth of the cyclical fluctuations. In Deleersnyder et al (2004), consumers are found to cut back more (= depth) and faster (= speed) on their durable purchases during contractions than they increase spending in subsequent expansion periods. Asymmetries in the speed of downward versus upward adjustments, or steepness asymmetry, may arise from the way consumers gain (slow) or lose (fast) trust in the economic climate (Nooteboom et al, 1997).…”

“…Deleersnyder et al (2004), for example, show that consumer durables in the U.S. are very sensitive to BCs, with cyclical fluctuations that are, on average, more than four times larger than (but in the same direction as) those in GNP. Similarly, Dekimpe et al (2016) find an excess sensitivity to economic cycles in the international tourism sector, while Cleeren et al (2015) show that also expenditures on health care are affected by aggregate economic fluctuations, as people save on their private healthcare spending during adverse economic conditions.…”

“…A rationale for this can be found in prospect theory (Tversky and Kahneman 1991), which posits that people react more extensively to unfavorable changes than to comparable gains. If households experience or expect a deterioration in their wages or income, they considerably reduce their spending levels, especially for more discretionary products, while upward adjustments during expansions trigger more moderate reactions (Deleersnyder et al 2004). Evidence of comparable asymmetries with CPG products is given in Lamey et al (2007), where consumers are found to switch quickly and extensively towards private labels in contractions, while their switching back to national brands in the subsequent expansion period occurs more slowly and less extensively.…”

“…Marn et al (2003), in turn, point out that managers have a tendency to increase prices (p) during a contraction to offset the revenue (p*q) losses caused by reduced sales (q) levels. Deleersnyder et al (2004), studying 24 consumerdurable categories, find evidence of counter-cyclical pricing: prices tend to increase during an economic contraction, and to decrease during an expansion. This, in turn, contributed significantly to the resulting amplified cyclical sensitivity in category sales.…”