The Commercial Consequences of Collective Layoffs: Close the Plant, Lose the Brand?

Unfavourable changes

Stremersch and Landsman analysed 205 collective layoff announcements of 20 major brands in the automotive industry which led to the termination of labour contracts of more than 300,000 employees. The researchers find that layoff firms experience unfavourable changes in sales, advertising effectiveness, and price sensitivity. In specific, they find that the average drop in sales across all announcements was 6.6%. After accounting for all other effects in the model, sales for the layoff brand are 8.7% lower following a layoff announcement. 

Reduced sensitivity to advertising

The researchers also observe that following collective layoff announcements, consumers become less sensitive to the advertising of the firm and more sensitive to its prices. Furthermore, the announcement characteristics explain some of the differences in the commercial consequences across announcements. They also find that firms do not universally increase or decrease their advertising spending following collective layoff announcements. However, their estimates reveal that firms typically spend less on advertising than they would in absence of the announcement in the layoff country, during the year following the layoff announcement.

Message for marketers

The findings of the research suggest that marketing managers and other representatives in areas such as finance and operations should take a look at the potential negative consequences of layoffs. The researchers also advice marketers in a layoff country to pay more attention to their advertising response, since they find that firms typically spend less on advertising following a layoff announcement. Therefore, marketers should think about the possibility of increasing advertising spending to compensate for the decreased effectiveness of advertising.