Brand Confucian

MK English News (by 매일 경제) reports that the “Nation’s velocity of money showed its worst performance in the first quarter of 2009,” and that “In short, the real economy failed to benefit from a massive injection of capital by the government and monetary authorities to save the faltering economy.

‘In short’ – to put it bluntly – such a conclusion is itself short-sided. While the real economy might not have benefitted from the government’s massive capital injection (and only time will tell whether this is or is not the case) measuring the efficacy of the strategy half way through the execution by the monetary velocity is akin to measuring the health of a stroke patient by how fast he can run a kilometer. Sure monetary velocity is connected with the overall health of the economy, but not in such a causal way as to form the basis of a terminal prognosis. I’m just glad that Ms. Hong’s not my doctor. “I’m sorry madam, but your husband didn’t complete the test in the allotted time, I’m afraid there’s no hope. Never mind that his faculties have all returned to normal, a 15 minute kilometer means that he’s basically dead.”

Here is the article in full with a few comments.

The nation’s velocity of money showed its worst performance in the first quarter of 2009.

In short, the real economy failed to benefit from a massive injection of capital by the government and monetary authorities to save the faltering economy.

According to the Bank of Korea (BOK) on June 7, Korea’s velocity of money plunged to 0.687 in the first quarter of 2009, marking the first 0.6 range since record- keeping began.

Velocity of money is calculated by dividing Gross Domestic Product (GDP) with M2 which illustrates the speed of money circulation in the market.

This she’s got right, although it might be helpful to define M2: money and close substitutes for money – i.e. cash, cash equivalents, savings deposits, time deposits (CDs) of less than $100,000 value.

In terms of quarter, velocity of money has consistently maintained a 0.8 range since 2000. However, the figure declined from 0.807 at the 2007-end to 0.778 in Q1 of 2008, followed by 0.748 in Q2; 0.703 in Q3; and 0.6 in Q1 of 2009.

Another indicator, money multiplier–M2 divided by reserve money– sharply declined from 26.5 in October to 26.3 in November, 24.2 in December of 2008 and 22.5 in January 2009. The figure managed to edge up to 23.1 in February, but slid back to 22.4 in March 2009.

Here it would be prudent to explain what the money multiplier really is. The money multiplier is a measure of the total amount leverage from an initial money deposit at a given reserve requirement (the amount of money that can be loaned (or created)based on a certain deposit amount). And yes, the money multiplier is calculated as M2 divided by the reserve amount. If this indicator is dropping, either the reserve level has been elevated, or M2 has declined. But wait…

Velocity of money has been slowing down primarily due to a surge in money supply amid negative growth of the real economy.

Another reason behind the declining velocity of money is reluctance in the banking sector to lend. Banks have increased lending to small-and mid-sized companies as advised by governmental policy, but aggregate loan severely lags behind the previous year. Bank’s lending to corporate sector rose by 3.2 trillion won ($2.5 billion) compared with April of last year which is a third of last year’s 10.9 trillion won ($8.6 billion).

[Yen-mi Hong/ JYK]

So basically here, Hong has explained how the money multiplier indicator has gone down. M2 has increased, but reserve levels at banks are uncommonly high. In effect, the government has released money to the banks, but they aren’t lending it out again.

In order to explain why Ms. Hong is using the wrong measure to judge the efficacy of the Korean government’s stimulus package, let’s look at what a capital injection is actually supposed to do. First, some basic economic monetary theory (don’t worry, I’m no economist, so I will keep this really basic).

GDP is defined as:

GDP = consumption + gross investment + government spending + (exports − imports)

In a recession situation where consumption, investment, exports and imports are all down, government uses two primary methods to bolster GDP

1.      Increase G (government spending). If the government spends on things like tax cuts, development projects, and handouts, the funds spent by the government are theoretically multiplied as they change hands, increasing consumption and possibly even investment (e.g. tax cuts produce increased consumer spending, development projects increases funds going to workers who participate in the economy)

2.      Cut the primary interest rate. In order to stimulate lending, the monetary authorities (the Fed in the US and Bank of Korea in Korea) will cut the rate at which they lend money to banks. Savings are then theoretically passed on to credit consumers – both individuals and corporations, who increase spending – in turn increasing consumption, investment, and possibly exports.

Now the question of velocity:

The relationship of velocity to GDP is defined in the following relationship:

Where nQ is nominal GDP (GDP adjusted for inflation), M is the supply of money in terms of M2, and V is monetary velocity.

Both government spending and interest rate cuts are designed to increase overall GDP. However, both also have the tendency to increase the overall money supply (M).

Hong is quite right in her assessment that the velocity “has been slowing down primarily due to a surge in money supply amid negative growth of the real economy.” However, her conclusion that “the real economy failed to benefit from a massive injection of capital by the government and monetary authorities” based on depressed monetary velocity fails to recognize what the primary purpose of government stimulus is.

Velocity has been shown to peak and decline just before or during a recession, and velocity decline generally outlasts the real-economy recession. Below is a historical chart of US monetary velocity which I borrow from a fantastic article on monetary velocity by Goldseek.com that illustrates this point well.

 The real question is: “to what extent will the stimulus buoy GDP.” For that I’m afraid the jury is still out.

What does this velocity talk mean for businesses? Not much really. I’d think the Korean consumer confidence index, which is at a 2-year high, or manufacturer sentiment, which is at a 7-month high would be a more useful indicators of the near future. While Korea is definitely not out of the woods, and the real economy may not have bottomed out just yet, most economists are cautiously optimistic. As for monetary velocity, banks will loosen their hold on funds, individuals and companies will increase their appetites for credit, and M2 is likely to increase dramatically over the short term. As GDP recovery will follow more slowly, monetary velocity is likely to remain low for some time. Frankly speaking, I don’t give a flying fuck, and neither should you.

 Marketing ethics 101: don’t lie to people

According to Yonhap news, Consumers Korea, a consumer advocacy group, released a report showing that several international and local Korean baby skin care product manufacturers are marketing products containing potentially harmful chemical preservatives and fragrances as ‘natural’ or even ‘organic’.

Seven of nine products labeled ‘organic,’ tested positive for potentially harmful chemicals including parabens, benzyl alcohol, PEG, and unqualified ‘fragrance.’

Working as a consumer products marketer I became familiar with just how difficult it is to create ‘natural’ products that perform decently in the market. Most of the additives mentioned by Consumers Korea serve a particular function. Without them product quality would suffer. 

In order to make product smell better, smoother, more viscous, less viscous, etc. the R&D guys insist you’ve got to keep the additives. It’s either that or kiss the product’s quality controllability/ acceptable expiration period/ temperature resistance/freight strain certification goodbye.

But your job is to sell. The market demands organic. Your competitors have removed all parabens and other chemical additives from their entire line – and pulled fragrance to boot.

“And you can bet they smell like dog shit and will rot if they’re not refrigerated too,” is the official response from R&D to your upbeat ‘if they can do it, we can do it better!’ market assessment memo.

So you’re forced to re-group. “Is there anything we can do to be more natural?” And this is where you begin to fuck up.

Just because you throw in a few ‘natural ingredients’ or even a single organic one, if the overall product formula contains parabens, unqualified ‘fragrance,’ PEG, or benzyl alcohol, you best not be claiming ‘natural,‘ let alone ‘organic’ on your product labels, or you are going to incur the wrath of some very belligerent consumers – namely baby mothers.

Granted, none of these ingredients are banned, or have even, quite frankly, been scientifically proven harmful beyond a shadow of doubt. But that is not the point. 

These marketers went wrong when they failed to deliver on expectations. And while their copy tricks probably seemed clever at the time, real marketing is about the end game. Real marketing is about the long-term relationship a marketer forms with the customer. If you’re tricking your consumer with your messaging, and they figure it out – and they will fingure it out, that copy is going to self-destruct. And it might take the brand down with it. Bottom line is, you had better be able to deliver on your value proposition.

Although I’m not going to list all the offenders, Boryung Mediance (보령메디앙스) deserves a dis-honorable mention for ‘Nuk Natural Diaper Cream.’ One would think that after the big asbestos-powder fiasco the company would at least make an effort at minding its PR p’s and q’s. But then again, I’m probably expecting too much from a company that came up with “Nuk” for a baby product line. On the other hand, with a name like that, maybe excessive harmful chemicals are totally in line with brand values?? Who am I to judge??

According to a May 17 report issued by marketing and communication firm Cheil Worldwide (below CW), Korean consumers purchasing patterns are overall less reactionary and more situational than they have been during past recessions. While still broadly sensitive to the economic environment, CW claims Korean consumers learned how to internalize and individualize the recession from their experience in the 1997 Asian financial crisis (broadly, if misguidedly, referred to – even by the media – as the ‘IMF crisis’ in Korea).

As reported by YTN 24 News CW identified 5 ‘broad’ consumer behavior types in the current recession:

Observing – 30% (불황주시형)

Demographic: Married individuals in their 40s. Upper-class white-collar households with monthly income exceeding 5 million won made up 44.2 percent of this group.

Behavior: 82.8 percent acknowledge the severity of the recession but don’t make large changes in purchasing patterns.

Synchronizing – 24.1% (불황동조형)

Demographic: Middle class families in their 30-40s. This group is dominated by homemakers and households with monthly income of 3-4 million won.

Behavior: 89.3 percent express concern about the severity of the recession. Synchronizers display a blind ‘alignment’ behavior toward the recession. This group is particularly likely to decrease (70.4 percent) consumer spending, most typically by ‘trading down’(55.3 percent) before nixing discretionary spending.

Korean Consumer Recession Purchasing Behavior Trends

Subordinating – 22.69% (불황복종형)

Demographic: Self-employed individuals and men figured heavily in this demographic. Families with monthly income of less than 3 million won were common. High household debt was also a common denominator for this group, with the average debt to income ratio at 71.8 percent.

Behavior: This group indicates a willingness to cut without regard to a commodity’s category or importance. Insurance is the only expense that seems to stick with this group.

Self Preserving – 14.7% (불황자존형)

Demographic: Unmarried individuals in their 20s.

Behavior: This group tends to contradict itself. While 94.8 and 74.2 percent respectively claim they are decreasing or delaying discretionary spending, only 3.1 and 2.1 percent respectively indicate willingness to give up favorite products and brands. This group displays an overwhelming (74.2 percent) aversion to decreased ‘personal investment,’ regardless of the economic environment.

Disregarding – 8% (불황무시형)

Demographic: Unmarried professionals and women dominate this demographic. Single income households with monthly income exceeding 5 million won comprise 47.4 percent of this group. As a group, disregarders display a better-than-average debt to income ratio of 45.6 percent.

Behavior: This group is motivated by quality of life and indicates a willingness to maintain discretionary spending.

The take-home message: now is not the time to cut back on marketing. Each of these groups – even the subordinators – can be reached through targeted communication. But marketers need to focus on 3 Re’s of Re-cession.

Re-search, research, research – Insights gained during a downturn are triply valuable because a) your competitors are likely cutting their research budgets and therefore sharpening your edge by default b) consumer behavior is more volatile making mistakes more costly but also creating hidden gem opportunities for those ready with the right message at the right time and c) recessions create an atmosphere of defacto group-think for marketers (especially those whose research budgets have been slashed) making it easier to zig group zag if you’ve got your message properly targeted.

Re-think pricing strategies. Now is not the time to slash all inventory by 50%. The Korean market in particular is ripe for price re-anchoring. It is important to maintain a broad perspective. Take a fresh look at your overall portfolio and current customer segments. Can you tweak your product offering or value proposition to increase market share or even open a new segment? Don’t focus only on down-trading. Look at disregarders, Self preservers, and possibly observers as well (together comprising 52.7 percent of the market) as potential up-traders as well. People will be looking for value bargains as well as price bargains. Well positioned price promotions and communication can help to increase market share for premium products in new consumer segments. Be careful of steep discounting however, as it tends to hurt brand image (even though your image will be a little sturdier during a recession so long as quality and supply are reliable).

Re-view advertising spending. It is a well documented truth that recessions are a great time to grab market share through effective advertising. However it would be a mistake to blindly increase advertising dollars in a gamble to increase market share. If you can, maintain the marketing budget and increase reach (your budget should go further as costs go down). If you don’t have a choice and must decrease advertising spending do it the smart way. Look for ways to cut advertising’s length without compromising on frequency or reach. The most important thing to remember about advertising is that you have to do it better in a recession. Better doesn’t necessarily mean more, it means better planned, more effectively positioned and timed, better targeted and expertly communicated.