Over the holidays, I had a discussion with an acquaintance from Angola. Key was the fascination with Luanda and the emerging skyscrapers, new emerging economy but also the visible divide between the rich (some super rich) and the rest of the populace. He pointed out there is a ‘thin middle class’, but quickly added thin not the nutritional definition but the proportion compared to the entire population. “We still have about half of the population in poverty”. That was not impressive for a country, which IMF ranks as the firth largest economy in Africa. He highlighted the continued decline in oil prices will have negative effect as sluggishness in the economy will affect consumer demand. That was a few week ago.
The oil prices have slipped from a high of US$120 per Barrel in June 2014 to about US$30 by February 2016. That is a massive 300% drop in about 19 months. Any market or economy experiencing such a drop would definitely feel the pinch. Like with other commodities, fall and rise in prices brings with it losses to some and gains to others. The oil exporting countries have suffered most from the decline as the steep decline has affected their revenues from such exports. A simplified example here is a country that was exporting 10,000 barrels would earn US$1,2Million in 2014, but by February 2016, would earn US$300,000 from the same amount. By all means, a deficit of US$900,000 is not a small amount. Hence, countries like Nigeria, Angola and Algeria have felt the most impact. Loss of earning have also greatly affected their forex markets, and the wider economy. The rising dollar has further exacerbated the issue. The Gulf Countries have also felt the impact, with most slashing subsidies on various sectors that enjoyed such support. A country like Kuwait earns 95% of its export revenues from the oil sector.
Oil acts as a catalyst for growth in any economy. In essence, it powers the economic engine of a country.
On the other hand, the oil importing countries are gaining from the decline in oil prices, as the new levels imply a decline in import bills and lesser outflow of forex. There is a great debate why the decline has not resulted to a significant fall at the pump prices. While the crude prices are the same across markets, the end-user prices vary by country due to various factors such as taxes and other levies. The pump prices may not fall in tandem with crude prices. That’s a discussion for another day.
The effect therefore varies across markets and marketers in the region have reacted to the fall in different ways. At a macro level, the losing economies may suffer from decline in consumer demand. This arises as decline in government revenue implies fewer projects are initiated / renegotiated / stopped leading to a fall in money to entities and jobs in affected sectors.
However, it is important to consider the impact at sector level. At this level, gainers enjoy the benefits, whether it is an exporting or importing country. For instance, the airline industry. A decline in oil prices is a benefit to Etihad (in an Exporting country) just as is to Kenya Airways (importing country). This is because the end user prices benefit all sectors. The table below shows some of the resulting issues.
| Winners | Losers | At country level | Importing countries | Exporting Countries |
| At Sector level | Transport vehicles, aircrafts …etc | Oil & Gas |
| Power producers (who rely on oil generators) | ||
| Consumer goods | ||
| Dealers / sellers of vehicles | ||
| Logistics / Courier | ||
| Agricultural production (Mechanized) and related delivery services | ||
| Overall effect |
Banking sector –
|
|
Hence, where does that leave the marketing fraternity? Understanding both the macro and sector-specific effects can help to navigate the new realities. The new realities could imply you spending on oil / fuel:
- Has increased – especially in countries that have eliminated fuel subsidies
- Has declined – those enjoying the decline in oil prices
- Has remained the same – where the governments / regulators have remained firm in the level of levies.
The above table shows some of the key sectors that have an almost direct effect from the change in oil prices and also subsequent changes in other sectors. However, there are also many indirect areas that come in play due to the changes. Marketers in the above sectors have a chance to invest more in their brands, and pass on the benefits to the consumers. This includes areas like fares – both land and air fares expected to fall.
The changes in oil prices therefore have an impact on three out of the four Ps in the marketing mix – which include Price, Promotion and Place. The article assumes the Product remains the same. As highlighted in the example of fares above, sectors enjoying direct positive effect of low fuel prices could pass the benefit to customers, with some immediate benefits such as low fares coming in place. In addition, with the cost of transport also coming down, there is a possibility of reducing prices at the counter for other consumer goods.
Promotions may also enjoy the benefits of low fuel. Some of the direct areas could include the customary road show. If you had shelved road shows due to high fuel cost, then this is the time to get them back on track.
Lastly, the lower fuel cost implies you can now deliver your products to more places or at a higher frequency (if need be) to your usual locations. Fuel costs should no longer be an excuse not to deliver to all markets in demand.
