The Sensitivity of Canadian Consumer Product Market Segments to Changes in Macroeconomic Conditions

Adam Finn, University of Alberta
ABSTRACT - The modern finance paradigm, developed from portfolio theory and the Capital Asset Pricing Model has transformed the field of finance. At the core of the paradigm is the partitioning of the total risk of assets into systematic and diversifiable components. The choice of a target market segment and of an associated marketing strategy appears to determine the systematic risk of a marketing project and, ultimately, of a firm. Marketing managers will increasingly need to be able to provide estimates of the systematic risk of their marketing projects. This requires a knowledge of the sensitivity of product market segments to changes in macroeconomic conditions, an issue that has been neglected in the consumer behavior literature.
[ to cite ]:
Adam Finn (1987) ,"The Sensitivity of Canadian Consumer Product Market Segments to Changes in Macroeconomic Conditions", in NA - Advances in Consumer Research Volume 14, eds. Melanie Wallendorf and Paul Anderson, Provo, UT : Association for Consumer Research, Pages: 562.

Advances in Consumer Research Volume 14, 1987      Page 562

THE SENSITIVITY OF CANADIAN CONSUMER PRODUCT MARKET SEGMENTS TO CHANGES IN MACROECONOMIC CONDITIONS

Adam Finn, University of Alberta

ABSTRACT -

The modern finance paradigm, developed from portfolio theory and the Capital Asset Pricing Model has transformed the field of finance. At the core of the paradigm is the partitioning of the total risk of assets into systematic and diversifiable components. The choice of a target market segment and of an associated marketing strategy appears to determine the systematic risk of a marketing project and, ultimately, of a firm. Marketing managers will increasingly need to be able to provide estimates of the systematic risk of their marketing projects. This requires a knowledge of the sensitivity of product market segments to changes in macroeconomic conditions, an issue that has been neglected in the consumer behavior literature.

This paper investigates the response of Canadian consumer product market segments to changes in macroeconomic conditions, using the detailed product line and consumer segment retail trade data published by Statistics Canada. The prime parameter used for this purpose is the RSS, the sensitivity to changes in total retail sales of the sales revenue that consumer product market segments generate at the retail level. Total retail sales are, in effect, used as a surrogate for macroeconomic conditions.

Estimating RSS

First, the variability of the seasonally adjusted real sales by retailers of product i within segment j is obtained using:

rsi,jt = (Sijt - Sijt-1)/Sijt-1    (1)

where

Sijt is the seasonally adjusted constant dollar sales of i in segment j during month t,

rsijt is the relative change in seasonally adjusted constant dollar sales of i in segment j from month t-1 to month t.

The standard deviation of rsilt provides a measure of the real monthly variability of the sales of i in segment t. If, rsmt, the variability in seasonally adjusted real sales of all retailer products and services across all market segments, is obtained in a similar fashion, then the RSS of product market segment it is defined and estimated as bRij from the regression equation:

rsijt = aRij + bRijrsmt + eijt    (2)

A RSS defined in this way is a dimensionless ratio of the percentage change in real sales of product 1 in segment j associated with a percentage change in real total retail sales. Values of greater than one indicate the product market segment is more sensitive to macroeconomic conditions than average.

Differences in the RSS of Product Market Segments

Because consumers can more readily defer purchases of consumer durables during periods of economic uncertainty or recession, durables will usually be more sensitive than non durables. The household production model of consumer behavior suggests two more sources of differences. First, if an activity can be obtained as a purchased service or produced in the household using input goods, the purchased service will be more sensitive than the input goods. Secondly, because of switching between activities, products consumed in the production of time saving activities will be more sensitive than those consumed in the production of time absorbing activities.

For high sensitivity products, such as furniture, motor vehicles, and restaurant seals, high socioeconomic status segments are expected to be less sensitive than lover status segments, such as blue collar workers. While it would be difficult to assess this directly. geographic segments may be useful proxies for status differences. For Canada, where manufacturing is concentrated in Central Canada, this suggests we could expect RSS to be hip in Ontario and Quebec, and low in the Atlantic Provinces and in the West.

Findings

Analysis of retailer and department store department data for January 1973 to December 1982 first confirmed that durable good markets were generally more sensitive than non durable good markets. There was strong support for the hypothesis that services and finished goods would be sore sensitive than the inputs which consumers could use to produce the same outputs in the home, but little support for the more difficult to assess prediction that market inputs to good intensive activities would be sore sensitive than inputs to time intensive activities.

Geographic segments within Canada did differ widely in RSS, with the highly sensitive motor vehicle market including some low sensitivity regions. Areas dependent on manufacturing for employment were more sensitive than other areas with a greater dependence on primary industries. The result was indirect support for the expected RSS effects of targeting differing consumer socioeconomic status segments.

For further information, write to:

Professor Adam Finn / Department of Marketing & Economic Analysis / University of Alberta / Edmonton, Alberta, Canada T6G 2R6.

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