Introduction
Considered to be the worst financial crisis after the Great Depression of the 1930s, the financial crisis of 2007-2008 hit hard the global economy, threatening the total collapse of the big financial institutions, which, although was prevented by the bailout actions of the national governments, kept the global stock markets at its all-time low. The crisis played a crucial role in the failure of many businesses, decrease in the consumer wealth and a slow economic activity, creating the European sovereign-debt crisis. The impact of the global recession hit the common people by giving rise to unemployment problems, loss of jobs, decreased salary, personal bankruptcies and foreclosures of homes. This caused a drop in the consumption of utility goods like food grains, vegetables and fruits as people started cutting down their expenditure. Unemployment and low salary levels also caused a huge drop in the spending after luxury goods like automobiles and fashion accessories. However, during this period when most of the industries were floundering under the impact of recession, per capita consumption of alcoholic beverages and tobacco witnessed a huge growth. The question that arises here is how come the tobacco and alcohol consumption remain strong during the recession when other industries experienced significant decline in their profit margins and sales volume. The purpose of this paper is to examine the issue further, making an analysis of what made the sales of alcohol and tobacco soar and remain strong during the recessionary period.
Background
The industries of alcoholic beverages and tobacco were some of the industries that witnessed a continued growth during the global economic slump. As per the report of Forbes (2011), even if the alcohol industry is not recession-proof, it is recession-resistant. In spite of the economic turmoil spread across the world, the sales of alcohol continued to thrive. Between July 2010 and July 2011 when the average unemployment rate exceeded 9.3%, the manufacturing of alcoholic beverages went up by 10%, and alcohol wholesalers and retailers witnessed a growth of more than 6% (Bierman 2011). In fact, during the period between July and mid-November of 2008, when the USA was going through the worst economic pain with a rising unemployment rate of 5.8%, the sales of alcohol in the USA grew by 9%. The Pennsylvania Liquor Control Board, which runs more than 600 stores across the state of Pennsylvania, recorded a sales increase of alcohol by 5%. Within a period of this four and one-half months, the sales of alcoholic beverages spiked up from $632.1 million of the same a year earlier to a staggering $663.5 million (Pickel 2008). Though the sales of alcohol were a little lower in 2009 compared to the previous year, it was still up by 1% from what it was prior to the recession. The overall revenue growth in the four alcohol-related industries, including alcoholic beverage manufacturers, retailers, wholesalers, and bars, has been at the highest level between 2007 and 2011 (Bierman 2011).
Just like alcohol, its delightful companion, the tobacco industry too witnessed a period of growth during the recession. Three largest multinational tobacco companies, including British American Tobacco (BAT), Philip Morris International (PMI), and Japan Tobacco (JT) delivered excellent results during the recessionary period. PMI, which is the largest international company of tobacco, recorded a whopping 869.7 billion sales of cigarettes in 2008, representing an increase of 2.5% in the sales figure. In the same period, the gross turnover reached $63.64 billion, representing an increase of 15.2% (He and Yano 2009). BAT, which is the second largest international tobacco firm, witnessed a sales volume of 715.0 billion units and a gross turnover of $62.82 billion in 2008, representing an increase of 4.5% and 25.2% respectively, as opposed to the previous year. The third largest company, JT, recorded an increase of 10.8% and 10.2% in the sales volumes and a gross turnover respectively in 2008 (He and Yano 2009).
Literature Review
Existing literature shows a connection between alcohol consumption and economic uncertainty. Boer et al (2013) investigated the reason for the sudden increase in alcohol consumption, and they came up with the finding that though the rates of abstinence from alcohol due to the economic downturn and decreased household income increased among the US adults, the total amount of alcohol consumption, however, increased due to the increase in the number of heavy and moderate drinkers in comparison with a decline in the number of light drinkers. The frequency of binge drinking increased by 7.2%. They noticed that due to the increased income and economic uncertainty, some people abstained from drinking alcohol, whereas some people in order to cope with the financial insecurity, the threat of loss of a home or life savings and other recession related difficulties increased alcohol consumption. Their study also shows that the frequency of binge drinking was highest among non-Black unmarried men under 30 who were unemployed for about a year or less than a year. Their study results are consistent with the findings of Luoto et al (1998) who too in their study found out that single men and the recently unemployed are more likely to resort to heavy drinking during economic crises in order to cope up with stress and insecurity.
The thriving sales record of the tobacco companies during the period of recession shows that the intake of cigarettes also went up significantly during the economic downturn. A survey conducted in Europe found out that since the introduction of the smoking ban in 2007, though the number of smokers declined, however, the rate of quitting smoking slowed down considerably in 2008 after the great recession engulfed the world, and there has been little changes since (Kirby 2010). Though people who quit smoking for more than two years did not fall into smoking relapse after their income decreased during the recession, the rate of quitting smoking among the existing smokers decreased significantly (McClure et al 2012). Despite tobacco accounting for about 5.4 million deaths each year, in the face of recession and economic insecurity, however, people cling on to the habit of smoking to release stress.
Analysis
Taking into account the increase of alcohol consumption during the recessionary period, it appears that alcohol consumption and the economic condition are related. The thriving economic condition brings more disposable income in the hands of people, making them prone to engage in indulgences. However, poor economic condition induces stress and insecurity. It is not uncommon for people to fall back on alcohol consumption to reduce stress. Research shows that people have a tendency to turn to alcohol as a coping mechanism (“The Link Between” 2014). Drinking relieves the heart of the constant worry and tension, even if for a short time. However, if the stress is continual, then people continue to reduce stress by drinking alcohol, which explains the sudden increase in heavy drinking during the last recession. Researchers also show that although both men and women have the propensity to turn to alcohol under stress, it is, however, men who are more likely to engage in alcohol consumption than women during stress, and this explains why the trend of binge drinking and heavy drinking was more among men than women (“The Link Between” 2014).
Although the 2008-2009 recession has caused the increase in the overall consumption of alcohol and tobacco, it is not a common trend. In fact, in other US recessions like the one in 1980 and another one in 2000 saw declines in the total alcohol and tobacco consumption. This brings us to a stage where understanding the social behavior in the face of changing macroeconomic and microeconomic conditions becomes interesting. In the case of a small recession, the unemployment rate goes up by a few percentages. This creates a little bit of sluggishness in the overall market. Some of the light drinkers and occasional smokers stop drinking alcohol or smoking cigarette as they want to save some money for other essential commodities during the period of crisis. However, drinkers of alcohol and smokers often do not start drinking or smoking heavily as the environment around them, though bad, is not very bad. In the case of a deep recession, like the one happened in 2008, light drinkers stop drinking as they can no longer afford to drink (Mann 2011). However, heavy and medium drinkers, who are mostly alcohol addicts, increase the consumption as they think that alcohol is the only way out of the depressing situation, fear of layoff and frustrations of life. Therefore, in the case of a deep recession when the heavy and medium drinkers feels threatened, the overall consumption rate goes up as the binge drinking by heavy drinkers compensates for the less number of light drinkers. The same effect can be seen for the tobacco consumers as well.
It is important to understand who these binge drinkers and smokers are. The majority of these binge drinkers are people between the age group of 25-30 years, single males and people aged between 55 and 59 years. People between the age group 25 and 30 years fear most about losing jobs, as they feel that they do not have much experience, and if the company decides on cutting down on the manpower, they will be the first ones to be sacked. On the other hand, people between the age group 55 and 59 fear a recession most, because they feel that they will be forced into early retirement by the companies (Mann 2011). These single males also do not have families, and hence, they can spend extra money on alcohol and tobacco consumption. People with a family size of four or more are seen to reduce drinking during recession as they feel responsible for other family members.
As we can see that the consumption increase of alcohol and tobacco is not broad based, and it is primarily caused because of a few heavy users. Therefore, it is almost impossible for the government to reduce consumption using measures like increased tax. The consumption pattern of heavy users of tobacco and alcohol and the price of alcohol are almost perfectly inelastic (Bor et al 2013). Therefore, microeconomic measures will not work. The only way to reduce the consumption is through awareness about bad effects of alcohol and tobacco.
Conclusion
2008 recession is considered as one of the worst in the human history. In fact, some of the economists believe that the extent of the impact of the 2008 financial crisis was equivalent to that of the 1930’s Great Depression. During the 2008 recession, the consumption of almost all the commodities reduced. Alcohol and tobacco were among the very few exceptions. Alcohol and tobacco consumption economics is not like other products. In fact, the economics of alcohol and tobacco is often said to be recession-resistant. During good times, people consume higher quantity of alcohol for celebration, whereas, during the period of recession, often binge drinkers consume huge quantities of alcohol to forget about the stress and fear associated with job loss and poor market conditions. Although, the total number of drinkers and smokers reduces in number during any recession, but it is often seen that binge drinkers and smokers increase the level of consumption so much that the overall alcohol consumption volume goes up significantly. The two demographics, people aged between 25 and 30 years and 55 and 59 years are the main binge drinkers during recession. The first group fears that they will be axed first because of their inexperience in the case of a manpower reduction in their companies. The second group fears that they may be forced into early retirement. This sense of insecurity is the primary reason for their binge behavior. Alcohol and tobacco consumption will always enjoy a stable growth path even during recession. The only way alcohol and tobacco consumption can be reduced is through awareness about bad effects of alcohol and tobacco.
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