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The Commercial Consequences of Collective Layoffs

The Commercial Consequences of Collective Layoffs

Vardit Landsman and Stefan Stremersch

Collective layoffs—the simultaneous termination of the labor contracts of a large group of workers—are quite common in many Western societies. In Europe alone, the 556 collective layoffs announced between December 2018 and November 2019 across different industries involved more than 250,000 employees. In addition to the societal implications, collective layoff decisions have an immense impact on the firms that initiate them.

In a new study in the Journal of Marketing, our research team empirically demonstrates the effects of collective layoff announcements on sales. We also explore whether collective layoff announcements influence the effectiveness of the firm’s advertising and the sensitivity of consumers to the prices of its products. 

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The termination of employment, particularly of large numbers of people, typically evokes negative connotations. It is, therefore, reasonable to expect that layoff announcements should have negative, rather than positive, effects on the layoff firm. We explore whether negative effects are universally present and the magnitude of such effects. 

From a broad perspective, collective layoffs might be seen as a specific type of firm crisis. Other types of firm crises are product-harm, violations of ethical or moral norms such as sweat-shop operations, or negative news about celebrities who have endorsed a brand. However, collective layoffs have several unique characteristics and thus the commercial consequences of such layoffs warrant specific consideration. For example, while firms do not purposefully initiate most types of brand crises, they do initiate collective layoffs and thus have some level of control over timing, location, and communication. Such control may help the firm to ex-ante contain the potentially adverse outcomes of the layoffs. Moreover, a collective layoff announcement does not directly reflect on the quality of the firm’s products, as with a product-harm crisis. However, the merit of the firm’s prior actions, or its prospects, may be called into question.

We focus on the automotive industry across nine major automotive markets (Austria, Canada, France, Germany, Italy, Japan, Spain, the U.K., and the U.S.) and study 205 collective-layoff announcements of 20 major brands between 2000-2015, which led to the termination of the labor contracts of more than 300,000 employees. Our model specification enables us to estimate the advertising effectiveness and price sensitivity of every affected brand over time and across countries.

Our data enable us to explore the differences in the commercial consequences of collective layoffs across characteristics of the layoff announcements. We identified three typical information components in an announcement:

  1. Motive: Did the firm motivate the collective layoff by a decline in demand?;
  2. Nationality: Is the firm domestic or foreign to the layoff country?; and
  3. Layoff Size: How many employees are affected by the collective layoff?

Our findings are as follows. First, for two-thirds of the collective layoff announcements in our sample, sales in the layoff country of the corresponding brands decreased in the year following the announcements compared to sales in the year before the announcements. The average drop in sales across all announcements was -6.6%. After accounting for all other effects in our model, sales for the layoff brand are 8.7% lower following a layoff announcement than the predicted level absent the announcement. Second, we observe that following collective layoff announcements, consumers become less sensitive to the advertising of the firm and more sensitive to its prices. Third, the layoff announcement characteristics do explain some of the differences in the commercial consequences across announcements. Fourth, firms do not universally increase or decrease their advertising spending following collective layoff announcements. (The median change in spending is about 2%.) However, our model estimates reveal that firms typically spend less on advertising (16% less, on average) than they would absent the announcement in the layoff country during the year following a collective layoff announcement.

Our findings are relevant to marketing managers in firms that plan to announce collective layoffs. First, our findings regarding the commercially adverse effects of collective layoffs suggest that marketing managers should claim a place in the taskforces that manage such layoffs, alongside functional representatives of other areas such as finance and operations, to reflect the potential adverse demand-side consequences perspective of the layoffs in layoff discussions. Second, given the adverse effects we find for advertising effectiveness, we recommend that marketers in a layoff country allocate attention to their advertising response. We show that firms typically spend less on advertising following a layoff announcement than what they would have spent absent the announcement. As a result, the adverse effects of collective layoffs on sales in the layoff country loom larger, not only because of lower advertising elasticity, but also because of lower advertising spending. An alternative response could be to increase advertising spending to compensate for the decreased effectiveness and to consider such higher ad spending in the layoff country as a restructuring cost.

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From: Vardit Landsman and Stefan Stremersch, “The Commercial Consequences of Collective Layoffs: Close the Plant, Lose the Brand? Journal of Marketing.

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Vardit Landsman is Professor of Marketing, Erasmus School of Economics, Erasmus University Rotterdam, Netherlands.

Stefan Stremersch is Chaired Professor of Marketing and Desiderius Erasmus Distinguished Chair of Economics, Erasmus School of Economics, Erasmus University; and Professor of Marketing, IESE Business School, Universidad de Navarra.