Winter-03 WISD.html

The Effect of a Currency Change on Consumers - what the EURO means for Europe's Shoppers

Blandine Labbé-Pinlon , Audencia School of Management, Nantes, France

Imagine this scenario: the US decides to strengthen its relations with its neighbors to the north and to the south by introducing a single currency for all
of North America. For argument's sake let's call it the 'AMERO.' From Tierra del Fuego to Alaska consumers will have the same money in their wallets. Americans will have two months to spend or exchange their last dollars before the US dollar ceases to be. But how will the average shopper react to the AMERO? Will retail sales dip dramatically or will a wave of euphoria carry it and the economy to success and economic stability?

If this sounds like pure fantasy, try talking to a European. On January 1, 2002 the residents of the European Union woke up not only to a New Year's hangover but also to the reality of the EURO. After two years of experience with the 'virtual' euro via bank accounts, checks, etc. this new currency hit the streets giving Europeans just two months to dispose of their francs, deutsch-marks, pesetas, liras, and all the currencies. Naturally, one of the big questions the arrival of the EURO raised was how the change would affect consumer behavior in the retail market.

The classic theories on pricing (Monroe, 1999; Nagle & Holden, 1995; Simon, 1989) on memory (Monroe and Lee, 1999; Coutelle, 2001) and on the acquisition of language (Zollinger, 2002) provide a foundation for some hypothesizing in regards to the impact that this currency exchange would have on consumers' perceptions of the new currency and its impact on behavior. In addition, since the initial adoption of the EURO in January 1999 a body of research has dealt specifically with the potential effects of this new currency on shoppers forced to adapt to a different system of pricing.

"...On January 1, 2002 the residents of the European
Union woke up not only to a New Year's hangover
but also to the reality of the EURO..."

Much of this research focuses on the 'accordion effect' which, due to the lower 'value' of EURO prices compared to the previous currencies radically affects pricing strategies (for example 1 EURO = 6.5 French francs, 166 Spanish pesetas and 1936 Italian lire). These sorts of impacts have been measured either via panel data (Bayle-Tourtoulou, Dietsch, Gérardon de Véra, Krémer, 1999) or through consumer surveys. These surveys addressed areas including the effectiveness of special offers (Gros, 1998; Dedeyan, 1998), buying decisions related to how the EURO could modify consumers' choice of product (Wildner, 1998) or pricing psychology focusing on the shift or elimination of significant psychological price bands (Diller, Ivens, 2000). Such papers were among the first to try to gauge consumer behavior when faced by the EURO effect.

To take this research a stage further, so measuring the tremendous impact of the EURO on consumers, the author conducted a research program 'on site' to predict consumers' behavior when faced with the EURO in a simulated retail environment and shopping context. The European Commission and France's National Council on Consumption instituted three types of labeling over a period of four years:

from 1999, labels were in EUROs and in francs with the price in francs printed larger than the printing of the EURO
from the end of 2001 to the start of 2002, labels in EUROs and francs with the price of the EUROs the same size or larger than that in francs
after 2002, price labels will be written only in EUROs.

The European Commission and France's Conseil National de Consommation recommended keeping labels in both currencies at least to the end of June 2002 to help consumers adapt to the change. But, even now, no final date has been set for the switch to a EURO only labeling. Most retailers want to have a currency labeling that will encourage this transition without negatively impacting consumers' purchase patterns.

Three areas of research that have been identified include:

the behavior of consumers in shopping situations before and after the switch to the EURO: this includes behavior at the point of checkout (payment problems, time taken) and in the store (reading of price labels, perception of prices and price differences, loss of traditional markers, time spent in aisles), and the effect of the EURO on their price sensitivity and their buying habits (choice of brands, promotions, quantities bought).
an analysis of consumers' EURO 'apprenticeship'; looking at the role of EURO/franc labels and evaluating their actual level of adaptation (adoption of the EURO).
a need to identify the actions which could help consumers construct a new set of value scales in EUROs and prepare consumers for the switch from each country's own currency to the EURO.

To better understand the impact of the EURO on both consumers and retailers, the author worked with a nationwide supermarket group (Groupe SYSTEME U) to put in place a research program to investigate this process. The research began in late 1999 with the setting up of the In Situ lab. This In Situ lab was designed
to replicate three standard aisles from one of Groupe SYSTEME U's supermarkets. A sample of 300 first year business students were exposed to a selection of 200 hair care products, 100 soft drinks and 80 breakfast foods. Subjects made their purchase selection then completed a survey on their perception of the shopping experience. Once in place, the In Situ lab was used for the first research project in late 1999 where consumers were faced with prices expressed only in EUROs, and a second project in late 2000 where price labels showed values in both EUROs and French francs.

The 1999 research revealed that despite fears that the EURO would significantly alter shoppers' buying habits, the new currency did not have a marked impact on the way they shopped. The sample of students tended to compare prices directly in EUROs and felt the only real risk to their price perceptions was a tendency to under-estimate the value of the EURO. As a result, goods were believed to be cheaper when priced in EUROs as opposed to francs. What these initial results indicate is the probability of a smoother adoption of the EURO than originally believed.

This positive news for both consumers and retailers throughout Europe was further confirmed through another study conducted in the In Situ lab with another sample of 300 business students in late 2000. In this instance, the author tested the next generation of supermarket labels that were expected the following year. Prices were still shown in francs, but the equivalent price in EUROs was given on the same label in much larger type. The logic of this labeling was borne out by the research which revealed that consumers found the technique to be a useful means of learning to think in terms of the EURO rather than their own national currency. However, despite the presence of prices in francs, the use of EUROs on labels caused many consumers to lose their traditional price references - much like the 1999 sample. This resulted in making subjects aware of the risk of underestimating prices in EUROs, thus they considered having spent more time shopping. Finally, their overall attitude toward the switch to the euro was as upbeat as that of their 1999 counterparts.

"...despite the presence of prices in francs, the use
of EUROs on labels caused many consumers to
lose their traditional price references..."

The two In Situ studies suggested what many observers had trouble imagining - the French consumer would adopt the EURO with open arms and adapt to it with little effort. The next issue was to test the generalizability of our results. Would the In Situ lab results extend beyond these two groups of students to a real group of consumers including the elderly, low income consumers, etc. To test the generalizability of her findings, the author set up a new In Situ lab at one of her partner group's hypermarkets. An empirical sample of 260 customers passed through the In Situ shop, each with 50 EUROs to spend in the store. During their shopping trip they were subjected to the same type of EURO-dominant labels as the student samples and to similar EURO adaptation aids planned by Groupe SYSTEME U's chain of stores.

The favorable response to the EURO/franc labeling was massive, with consumers evaluating the technique as a means to facilitate the transition to the new currency. Another result of the research demonstrated that these shoppers could be split into two major groups - "the confident consumer" and "the worried consumer" - when faced by the EURO (Labbé-Pinlon, Kempf, 2001). Approximately 70% of those categorized as confident consumers adapted smoothly to the currency changes without encountering long term problems. When confusion arose due to the EURO, the confident consumer reconstructed a set of price references based on known quantities. In this way, these consumers often referred back to key price references (such as 100 French francs being roughly equal to 15 EUROs) or used the prices of products bought regularly before the change in currency to help master pricing in EUROs. As a last resort they would refer to the price in francs, even if it was presented in a smaller type than that in EUROs. Conversely, the worried consumer (around 20%) seemed to lose their way completely, they experienced problems in converting prices or price differences and were concerned about the risk of underestimating the cost of goods. Of these consumers, 45% considered that they had underestimated prices - a worry confirmed by the research where this type of consumer used a rough conversion to calculate that a bottle of shampoo costing 2.16 EUROs would have cost 13 francs, only to discover that the real equivalent was 14.74 francs.

To sum up, a year before the EURO's launch the French shoppers in this study spent more time in the supermarket when faced with pricing in euros, but for the most part their behavior and price perceptions were not impacted by the currency change. Indeed, 90% of confident consumers and 80% of worried consumers felt that they would have bought the same products and brands if the prices had been displayed in francs. Indications from the results of these three studies were that the French consumer would continue to shop as he or she had done prior to this currency conversion.

On January 1, 2002 the EURO made its arrival into Europeans' wallets and lives. Now that the new currency had physically been adopted, the author decided to set up a new research project, the 'EURO barometer' (Labbe-Pinlon, Kempf, Coutelle, 2002) to measure to what extent consumers' general optimism before the coming of the EURO had continued once it came into circulation. The barometer is based on a questionnaire answered by 250 shoppers representing the classic client base of one of Groupe SYSTEME U's hyper-markets. The following table shows some of the scales used to establish this barometer:

A first round of surveys were carried out in February 2002. The results confirmed that an overwhelming 85.4% of consumers found labeling prices in EUROs and in francs helped them to adapt to the new currency. Exactly half of the February sample expressed a wish to 'immerse' themselves in the EURO and believed the EURO/ franc label was an effective method of beginning this transfer process. Almost 50% of the shoppers surveyed went as far as reading the price in EUROs first and only 20% read the price in francs before looking at the EUROs. A majority (52.3%) continued to consider the risk of prices rising due to this currency conversion but 39.5% of consumers believed that they were ready to make the complete conversion to purchasing solely using the EURO and without the need to have the EURO/ franc labeling. Thus, the new currency seemed to have found its place with the French consumer.

Perhaps the most positive finding to emerge from this research was consumers' insistence that while the EURO/franc labels helped them, the optimal strategy was to rapidly phase out the double labeling to encourage consumers to make the change to the EURO currency. 70.4% of consumers sampled preferred this type of single labeling to be introduced by the end of June 2002. Of these, 40.8% preferred the switch to be made prior to the June 2002 deadline. Also, 94.6% of consumers believed that they had purchased the same valued products and brands by using the EURO or the French franc. Finally, 94.2% believed they had made the same choices during their shopping trips before and after the EURO's arrival.

The critical question for policy makers and consumers is how generalizable are these EURO- friendly results due to a honeymoon period following the introduction of the currency? Once the euphoria died down, how would consumers who said they would adopt the EURO, learn to live with the new currency? To answer these questions the author reactivated her EURO barometer in June 2002 - six months after the new currency was launched in Europe. The survey results from June's research revealed a nation of consumers shaken by the change in currency and in need of reassurance. This was in stark contrast to the survey results from the February study.

The ease with which consumers dealt with the transition to the EURO had changed dramatically by June. Rather than remaining or exceeding their euphoric levels, consumers were now less enthusiastic about the change in currency. In the February survey results, 50% of consumers converted prices in EUROs into French francs compared to the significant increase to 72.9% in the June survey. 32.2% of consumers interviewed reported making little or no effort to adapt to this new currency compared to 22.3% four months earlier in the February survey. The pattern continues to look bleak when looking at how effectively consumers were able to judge price increases in EUROs. In February 2002, 19.3% reported having problems with this aspect of shopping while in June the figure had risen significantly to 27.1%. Although the June consumers had been able to guess prices in EUROs more accurately than their February counterparts as they succeeded in memorizing certain key prices, the risk associated with this change in reference pricing was significant among this second wave of consumers.

Perhaps the most concrete evidence for this perceived risk of the new currency impact is the June sample's belief of when the EURO/franc double labeling system should be dropped. Almost two-thirds of those questioned in February wanted to see the end of this double labeling before the end of June 2002 so as to further aid their adoption of the new currency. However, in June, faced with the reality of the problems of adaptation, with public rumors and with the perceived risk of underestimating the value of the EURO, consumers made a definite U-turn in their beliefs. 28.6% of the June sample preferred to maintain the EURO/ franc labels due to be phased out by the end of June and 36.1% even wanted to see the double labeling preserved into 2003 (compared to 12.7% in February).

Thus, despite the fanfare of a new currency for a new Europe, consumers are still mentally clutching to their old money almost a year after the switch to the EURO. Whether by habit, idleness or fear of hidden price hikes, the French have not given the single European currency the warm welcome initial studies predicted. The months to come will reveal whether such a stance is part of the adjustment process for consumers or is indeed a deep-rooted problem that public policy makers will have to contend with to facilitate the acceptance of this inevitable change in pricing and currency structure.

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