“New Frugality” May Be an Enduring Feature of Post-Recession Economy

A “new frugality,” born of The Great Recession and evidenced by two consecutive years of declining per capita consumption, is now becoming entrenched consumer behavior that is reshaping consumption patterns in ways that will persist even as the economy rebounds, according to a new survey of 2,000 U.S. consumers from Booz & Company.

This new consumer spending report confirms a picture of pervasive retrenchment in consumer spending that spans a broad range of consumer product categories. But the survey also suggests that increased frugality may have become learned behavior, making many Americans more cautious and discerning consumers. What is more, the study suggests that these behaviors are “sticky,” and unlikely to quickly change as the economy shows signs of improvement. For example, in the next 12 months just 9% of consumers intend to spend at pre-recession levels on household products, 10% on mobile phone service, 11% on health and beauty products, and 18% on apparel, clothing, and shoes. Moreover, nearly two-thirds (64%) of consumers say they’ll shop at a different store with lower prices even if it’s less convenient for them.

“Frugal behavior is now considered trendy by many shoppers, and will continue for years to come,” said Matt Egol, a Booz & Company Partner. “In this changed environment, marketers need to develop deeper insights into shopper attitudes and behaviors in order to better align their product, pricing, and marketing communications strategies.”

Evidence of changed consumer attitudes abounds in the study. For example:

•Approximately two-thirds of the respondents (65%) say they now consider saving to be more important than spending, and that they frequently use coupons.
•More than half (55%) say they would rather get the best price than the best brand.
•More than half of consumers surveyed reduced discretionary spending on a range of categories, including dining out (58%), consumer electronics (53%), apparel (53%), and media and entertainment (51%).

Further, these attitudes are translating into strong behavioral change going forward:

•Nearly two-thirds (64%) of consumers say they’ll shop at a different store with lower prices even if it’s less convenient for them.
•Only one-third (32%) of respondents believe that their household financial status over the next twelve months will change for the better, reinforcing focus on frugal shopping behaviors such as deferring spending, trading down to lower price points, or buying their favorite brands during promotions
Several other consumer behaviors characterize the “new frugality.”

Highlights include:

Shopping itself is less impulsive and more disciplined. Recession-habituated shoppers are more inclined than ever to do research before going to the store. This was especially true, the survey revealed, in three categories: Health and Beauty (83%), Household Products (82%) and Food and Beverage (79%).

Another study conducted this past Fall by Booz & Company in collaboration with Grocery Manufacturers Association, “Shopper Marketing 3.0,” found a comparable proportion of shoppers conducting research before they shop, with a focus on finding the best prices, clipping coupons, and reading circulars for what is on sale. The “Shopper Marketing 3.0” study also found that many shoppers use price breaks to justify buying the brands they love.

The shift to private label products has accelerated and shows no signs of slowing down. In fact, Booz & Company analysis shows that private labels are likely to continue to take share from brand names. Said Egol, “Retailers are unlikely to give brands back the shelf space that private label has taken given their dependence on private label for profits. In addition, consumers are reporting generally positive experiences when trying private labels, so for some consumers they are becoming preferred brands.”

However, the move to lower price points overall, while pervasive, is not universal. Generally, shoppers are opting for lower priced brands in apparel, household products, and food. But they are less inclined to “trade down” when purchasing alcoholic beverages, tobacco, and health and beauty products.

Not surprisingly, big ticket items will continue to see the biggest household spending cuts: In the past year consumers continued to defer expenditures for items like consumer electronics (only 22% made purchases) or home improvements (23% made purchases). These behaviors will continue in 2010; only 13% and 17% respectively said they would revert to pre-recession buying habits in these categories.

Implications for Marketers

The Booz & Company survey sheds light on the challenges faced by consumer marketers and retailers emerging from the recession. Specifically, faced with the same basic economic trends, consumers are behaving differently with respect to their attitudes toward value and loyalty. Booz & Company identified six distinct, new consumer segments that can help interpret how customers shop in terms of brand loyalty, retail format loyalty, and online behaviors. These segments range from “Shopper 2.0” – young consumers who tend to buy online, regardless of product category, who are price sensitive with few brand or store format loyalties – to “Loyalists,” largely male, who are loyal to both brands and the stores where they shop, but are also avid users of the Internet for research and buying.

“This more cautious consumer approach to spending began even before the recession came into full swing but has since picked up speed,” said Booz & Company Partner Andrew Clyde. “As manufacturers lured consumers with new promotions, consumers traded down and liked the experience. As the economy recovers, marketers need to better target their strategies to preserve the value of existing brands, and avoid destroying value through too blunt a competitive response across segments.”

For retailers and consumer products manufacturers, Booz & Company identifies specific areas to spur growth and profitability coming out of the downturn:

•Building marketing strategies and tactics that address where and why consumers shop – rather than relying too heavily on demographics-based approached used for advertising buying.
•Determining differences in consumer behavior across product categories, offline vs. online shopping occasions, and specific retailers/etailers.
•Differentiating marketing messages and promotional offers to more price conscious consumers vs. those who place greater value on brand or convenience.
•Engaging shoppers along the full path to purchase, rather than treating online and in-store interactions as silos.

Recession Creates New Holiday Shopping Trends

Survey data from PriceGrabber.com, a part of Experian, reveals that the state of the economy is shaping new trends in holiday shopping. More than ever, comparison shopping is on the forefront of consumers’ minds, with 70 percent of consumers doing more research and comparison shopping online, compared with 38 percent last year.

Consumers are also crossing acquaintances (57 percent) and coworkers (53 percent) off their gift lists. Other findings from the PriceGrabber.com survey of 2,018 online consumers conducted from Sept. 24, 2009 to Oct. 12, 2009, reveal:

Consumers are cutting back — 53 percent plan to spend less

Many consumers have made a concerted effort to cut back over the last year due to the recession. A recent PriceGrabber.com survey revealed that these efforts will continue into the holiday shopping season and set the stage for new trends in holiday shopping. Fifty-three percent of consumers are planning to spend less than they did last year. Of the consumers who are planning to spend less this year, 48 percent reveal that one of the reasons that they are spending less is due to an increase in prices (necessities, gas, etc.), 45 percent cite lack of confidence in the economy, and 38 percent indicate making less money as a reason for spending less.

Shopping starts earlier to ease the impact of holiday spending — 22 percent start their holiday shopping in October

Cutting back on spending is not the only holiday trend being impacted by the recession. In past years, Black Friday (the day after Thanksgiving) has been the unofficial start of the holiday shopping season. This year, consumers are planning to start their holiday shopping long before Black Friday, with 22 percent of consumers starting their holiday shopping in October and 29 percent starting in November.

Gift lists are trimmed down to manage budgets — 57 percent are not purchasing gifts for acquaintances

Consumers are also making some significant cuts to the number of people on their holiday gift lists. When consumers were asked to compare this year’s gift list to last year’s, 57 percent of consumers revealed that they are not purchasing gifts for the acquaintances that they purchased gifts for last year. Fifty-three percent of consumers are not purchasing gifts for the co-workers that they purchased gifts for last year. When it comes to holiday spending this year, 36 percent of consumers expect to spend between $100 and $499, 28 percent plan to spend $500 to $999, and 30 percent anticipate a holiday spend of $1,000 or more.

Consumers are using more money-saving techniques — 50 percent shop at discount or outlet stores

This year, in order to meet holiday spending budgets, more consumers are utilizing money-saving techniques for their holiday shopping when compared with last year’s PriceGrabber.com survey, Holiday Consumer Spending Survey (2,641 respondents, conducted from Oct. 20, 2008, to Nov. 10, 2008). Fifty percent of consumers are planning to shop at discount or outlet stores this year, while only 43 percent did so last year. Twenty-nine percent of consumers are planning to purchase gifts for fewer people this year, while only 10 percent did so last year.

Deloitte Consumer Spending Index Up For The Fourth Consecutive Month

The Deloitte Consumer Spending Index rose again in September, hitting its highest level in two years. The Index attempts to track consumer cash flow as an indicator of future consumer spending.

“The fundamentals of consumer spending continue to improve, giving households increased purchasing power,” said Carl Steidtmann, chief economist with Deloitte Research, a subsidiary of Deloitte Services LP, and author of the monthly Index. “The housing market is beginning to show signs of stabilizing while initial unemployment claims have fallen significantly. Household net worth is rising and real wages are climbing at their fastest pace in 40 years. Signs of recovery got a boost from the cash for clunkers program in August, plus a gain in real spending has materialized across the board in recent months.”

The Index, comprising four components — tax burden, initial unemployment claims, real wages and real home prices — rose to 3.44 percent, from an upwardly revised gain of 3.08 percent a month ago.

“The Index suggests that many households increasingly have the means to spend, and with the worst of the downturn seemingly behind us, the retail environment may soon see signs of life,” said Stacy Janiak, vice chairman and Deloitte’s U.S. Retail leader. “Retailers have tackled cost cutting and cash conservation and the next few months will likely be all about enticing the consumer to spend. Offering personalized marketing, enhancing in-store customer conversion tactics and encouraging online product reviews are just a few of the ways that retailers may be able to gain an edge this holiday season.”

Highlights of the Index include:

Tax Burden: The tax burden continues to fall with the weakening of the economy. The tax burden is at a level only seen on a few occasions over the past 50 years during brief periods following tax rebates. Continued decline is expected.

Initial Unemployment Claims: Initial unemployment claims have come down sharply over the past three months which historically has been a reliable signal of economic recovery. Claims are down more than 100,000 from their recession peak.

Real Wages: Real wage growth continues to post solid gains due in large part to falling prices. Real wages are up 4.8 percent from a year ago as falling prices have given a big boost to consumer purchasing power.

Real Home Prices: The pace of decline in home prices has slowed significantly on a year over year basis. Continued efforts to forestall foreclosures coupled with a tax credit for first-time home buyers have brought some stability to the housing market. The decline in home prices has made home buying much more affordable.

Entrepreneurs Haute This Fashion Week

Fashion week is approaching and despite the recession putting a damper on retail sales, industry research firm IBISWorld ranks fashion design as one of the top start-up opportunities for entrepreneurs in 2009. As fashionable clothing is becoming more affordable and consumers start to regain confidence, the Los Angeles-based firm forecasts industry-wide recovery to take place in the second-half of 2010, with an average annualized growth of roughly 6.3 percent in the coming five years.

“Consumer attitudes toward spending are changing, and it’s shaping the direction of fashion,” said George Van Horn, senior analyst at IBISWorld. “Being style-conscious doesn’t mean people aren’t being budget-conscious, and vice versa. Successful fashion houses are those delivering style and quality with affordability, and we can expect this trend to linger for the foreseeable future.”

As the saying goes, cheap is chic. With overall prices being driven down, retailers offering luxury apparel, like Saks Fifth Avenue and Neiman Marcus, have been the hardest hit, cutting costs and discounting stock in an effort to sustain profit margins.

Industry-wide, fashion design businesses have seen significant pressures on margins in recent years, with current levels approaching 6 percent versus 30 percent only a few years ago. The need to retain contracts and ensure ongoing cash flow is yet another factor behind prices going down. Even prestigious designers are bailing on displaying their latest collections on the runway or have declared bankruptcy, such as German fashion house Escada and couture designer Christian Lacroix.

“This has certainly been a make-or-break year for fashion,” said Van Horn, who advices new entrants to differentiate their services based on smart pricing strategies, quality and creative self-marketing, rather than through reliance on advertisement. “In recent years, smaller independent designers have been sprouting like never before, largely attributed to the growing popularity of online retail, as well as relatively low entry barriers and start-up costs. This has helped give the industry the ability to move forward, despite the retail sector taking a big hit.”

Additional links

Fashion Design Services: http://ibisworld.com/industry/default.aspx?indid=1413
Clothing Accessory Stores: http://ibisworld.com/industry/default.aspx?indid=1070
Women’s Clothing Stores: http://ibisworld.com/industry/default.aspx?indid=1067
Big Box Retail Stores: http://ibisworld.com/industry/default.aspx?indid=1092
Miscellaneous Retail Stores: http://ibisworld.com/industry/default.aspx?indid=1106

The Cash For Clunkers Aftermath

If there was one pocket of the auto industry doing remotely well this past year, it was used car dealers. While the recent Cash For Clunkers program did boost new car sales, it also accounts for 7 percent of the expected decline in used car sales in 2009, according to industry research firm IBISWorld.

“Of course, there are winners and losers,” explained George Van Horn, senior analyst with IBISWorld. “Dealerships selling used cars will invariably get the short end of the stick, as the program has created a greater number of substitute consumers to purchase new rather than used vehicles.”

New car sales this year are estimated to be 20.5 percent lower than in 2008, down to 10.5 million. But if the program was not implemented, IBISWorld estimates total new car sales would be about 700,000 units fewer in 2009, at about 9.8 million (representing a 25.8 percent decline). So far, the most popular vehicle purchases and trade-ins are as follows:

Top 5 Vehicle Purchases	Top 5 Vehicle Trade-ins
Toyota Corolla	Ford Explorer (2 & 4 wd)
Honda Civic	Ford F-150
Ford Focus fwd	Jeep Grand Cherokee
Toyota Camry	Jeep Cherokee
Toyota Prius	Dodge Caravan

Light trucks were the most traded-in vehicle, which is a net positive for the program’s goal in encouraging Americans to drive more environmentally-friendly, fuel-efficient vehicles. And while critics are quick to argue how most of the cars sold will actually benefit foreign companies like Toyota, General Motors ranks second as being a top manufacturer for new vehicles purchased:

Top 5 Manufacturers	%
Toyota	18.9
GM	17.6
Ford	15.4
Honda Motor Co.	12.9
Chrysler	9.1

Among others to reap the benefits of the program are finance and insurance companies. Even with a $4,500 maximum cash rebate, lenders and insurance providers will both benefit from the higher fees associated with increased loan volumes, loan balances and higher car values on the new cars purchased. At the other extreme, with all that clunker clutter, salvage yards will be a lot busier than usual.

“Cash For Clunkers strives to induce consumer spending on fuel-efficient cars, as well as give the auto sector a boost by helping dealers generate turnover. The program has been successful in doing just that, but it’s really a short-term fix, not a long-term solution,” said Van Horn.

Less Luster For Tiffany In Jewelry Industry

Sales are lackluster for high-end jewelry retailers this year as Tiffany & Co. is declining much faster than the jewelry industry as whole, according to industry research firm IBISWorld. Analysts at the firm expect industry revenue to fall 4.8 percent to $28.26 billion this year, with price competition from big-box retailers, like Walmart, stealing market share sparkle from traditional jewelry retailers.

“Although luxury shoppers represent a small elite portion of the population, they are the primary target market for high-end jewelers,” said George Van Horn, senior analyst with IBISWorld. “Even the wealthy are cutting back on extra discretionary purchases like jewelry and watches.”

Tiffany is expected to generate earnings per share of about $0.34, which will represent a decline of 46 percent from the $0.63 cents per share compared to the same quarter in 2008. Also, revenue for the quarter is expected to be about $600 million, which will be down 17.3 percent from the $732 million for the same time in 2008.

The fourth quarter of 2009 should see a significant revenue boost compared to the tough Christmas trading period of 2008. It is during this period, the fourth quarter, when jewelry stores will begin to realize more solid returns and better operating performance. As a result, profitability is expected to rise from 10.5 percent of revenue in 2009 to 11.2 percent of revenue in 2010, as luxury spending slowly returns.

While some improvement in industry operating conditions is expected in 2010 as the economy improves, IBISWorld industry risk ratings for jewelry retailing will remain at a very high level. Despite some modest improvement in ratings during the past six months, jewelry retailing continues to have the highest risk rating among the 60 different forms of U.S. retailing that IBISWorld monitors.

Over the coming few years, one of the major challenges for the industry will be the entrance of De Beers into the Jewelry Stores Industry. De Beers is planning to stake its ground as a retailer with a long-term plan to open around 150 stores under the De Beers LV joint venture with LVMH Moet Louis Vuitton. IBISWorld estimates that this move by De Beers will further increase the competition and boost the consolidation that has been under way over the past few years.

“The Jewelry Stores industry is on the precipice of a restructure at both retail and wholesale level that forces players to move quickly to ensure long-term viability,” added Van Horn. “Tiffany will continue to be challenged in finding new ways of selling its products without compromising its brand.”

Retailers Having Back To School Blues

With 55.8 million kids enrolled in public and private schools this fall, retailers can anticipate their usual brief stint of shoppers. But given lackluster consumer spending and a 9.4 percent unemployment rate, it is no surprise analysts at industry research firm IBISWorld expect back-to-school spending to decline by 3.4 percent – from the $20.42 billion generated in 2008.

In probing their back-to-school cost breakdown, the Los Angeles-based firm divided the following four categories into what it considered to be typical school-related expenses: electronics, traditional supplies, footwear and clothing.

“Parents will inevitably put more thought and less dollars into their back-to-school shopping strategies,” said George Van Horn, senior analyst at IBISWorld. “In particular, dollar-variety stores can expect to see a greater wave of traffic since parents are doing everything they can to save an extra buck”.  In fact, IBISWorld approximates 21.3 percent of sales from the $47 billion discount-retailer industry to come from school and office supplies alone.

The fastest growing category, electronic school supplies, will see a slight decline of 1.8 percent, down to $5.12 billion. Parents on average will spend $91.69 per child on electronic equipment this year, a fairly significant leap from the $43.36 average observed in 2005. Items such as calculators and personal laptops are must-haves in today’s learning environment, and IBISWorld predicts that by 2016, this sector will become the number one back-to-school spending category – overtaking the core area of clothing, as the learning environment becomes more technologically focused.

The biggest decline this year comes from the clothes category, expected to plunge 5.4 percent. For each child enrolled in school this year, sporting the latest trends in clothes and accessories will cost parents $136.60 on average.

And for the 1.23 million kids that will be home-schooled this year, IBISWorld found that while parents may be saving on certain expenses like clothes and shoes, educating a child at home escalates costs in other areas. In particular, parents incur the hefty price of purchasing the latest teaching tools, textbooks, and learning equipment – typically covered by public and private schools.

“Back-to-school spending is a necessary and justifiable expenditure,’” said Van Horn. “Retailers have driven down overall prices in order to entice consumers, so price-conscious parents won’t need to significantly cutback, because they will get a lot more out of their dollar this year.”

About IBISWorld, Inc.
Recognized as the nation’s most trusted independent source of industry and market research, IBISWorld offers a comprehensive database of unique information and analysis on every U.S. industry.  With an extensive online portfolio, valued for its depth and scope, the company equips clients with the insight necessary to make better business decisions.  Headquartered in Los Angeles, IBISWorld serves a range of business, professional service and government organizations through more than 10 locations worldwide.  For more information visit www.ibisworld.com or call 1-800-330-3772.

The Cost of America’s Groceries

Americans have many choices when it comes to supermarket purchases: store brand, commercial brand, organic, etc. – but what is the cost difference and does it vary across the nation? Industry research firm, IBISWorld, investigated grocery costs in Los Angeles, New York City and Chicago to gauge consumer spending across the U.S. Here are the findings for the average grocery cart:

 

On average for all food-brand categories (store, commercial and organic), Chicago is the cheapest of the three analyzed regions, coming in at $115.73. New York was the most expensive at $122.6, while Los Angeles was slightly cheaper at $121.66.

The consumers with the lowest grocery bill ($92.04) are those in Chicago purchasing store brand products. This compares with $104.54 and $105.84 for New York City and Los Angeles, respectively.

Chicago did however have the most expensive organic bill, coming in at $142.95, and Los Angeles had the cheapest at $135.80. This is due to Los Angeles’ proximity to Mexico as well as the high volume of food production in California. With the biggest selling area of organic groceries being fresh produce – expected to account for 42 percent of sales this year – and California accounting for 53.8 percent of the nation’s melon and vegetable production, it is no surprise Los Angeles shoppers have cheaper organics.

 “Large supermarkets have bypassed wholesaling activities as much as possible, and by taking greater control of the entire supply chain they have been able to minimize the cost structure for store brands versus competing products,” said George Van Horn, senior analyst with IBISWorld. “Organic markets still look to ‘own the supply chain’, but they operate on a much smaller scale, resulting in markups.”

According to IBISWorld’s findings, the average organic grocery cart is about 18 percent more expensive than a grocery cart primarily filled with commercially branded products. But the organic grocery cart is a staggering 37.6 percent more expensive than a basket primarily filled with store branded products.

“Despite the high price of organic products and the recession restricting budgets, the organic food market is still growing by four percent in 2009,” adds Van Horn. 

About IBISWorld, Inc.

Recognized as the nation’s most trusted independent source of industry and market research, IBISWorld offers a comprehensive database of trends and market analysis on every U.S. industry. With an extensive online portfolio, valued for its depth and scope, the company equips clients with the insight necessary to make better business decisions. Headquartered in Los Angeles, IBISWorld serves a range of business, professional service and government organizations through more than 10 locations worldwide. For more information visit www.ibisworld.com or call 1-800-330-3772.

Euro Retail Sales Also Taking a Hit

According to the Bloomberg Euro-Zone Retail Purchasing Managers’ Index,  retail business conditions in Europe continued to deteriorate in June, with sales, employment, purchasing of stock and margins all falling compared with May.
When compared to May, retail sales fell in all of the three largest euro countries:

 -Germany experienced the steepest drop in monthly sales of the three, and was also the only country to record a sharper rate of decline. The index fell for a second successive month from 46.3 to 46.0, signaling the largest monthly drop in sales since March and the thirteenth successive decline. The average decline for Q2 as a whole was the smallest since the second quarter of last year.
-Sales fell in France for the fifth successive month. The rate of deterioration slowed to near-stagnation to register the smallest monthly decline over this period and the best performance of the three countries. The index rose from 48.3 to 49.4. For Q2 as a whole, the decline was the weakest recorded over the past three quarters.
-Italy saw sales drop for the twenty-eighth consecutive month. The index rose from 46.5 to 47.0, registering the smallest monthly decline since October 2007. The rate of contraction has moderated since the record pace seen last November, meaning the average monthly drop in sales during Q2 was the smallest since Q2 2007.

Euro area retail sales were down from June 2008. The year-on-year sales index rose from 38.7 in May to 42.7. This upward movement pointed to an easing in the rate of decline from the severe pace seen one month earlier. Sales fell from a year ago in all three countries, led by Italy, which was also the only country to see an acceleration in the rate of decline. Germany reported the weakest overall year-on-year drop.

Americans Still Not Spending

According to Mintz.com, Americans are continuing to tighten their belts through Q1 of this year. 2008 data shows users of the online personal finance service cutting spending by an average of 4% each quarter, and by another 4% in Q1 2009. Overall Q1 2009 spending was down 17% versus Q1 2008 across eight key categories. This indicates that, at a national level, the leading money management and budgeting service’s users remain concerned about the length and depth of the U.S. recession and its potential impact on family job loss and economic security.

This continuing trend of regular expense reductions tells me that consumer confidence is not yet on the rise,” said Aaron Patzer, CEO and founder of Mint.com. “Our users are looking for more concrete evidence that the U.S. economy is truly bottoming out before they’ll be returning to prior spending levels … if in fact they do. While it’s tough to know that 17% of last year’s spend has fallen out of the American economy, it’s satisfying to know that our financial management and budgeting software appears to be helping our growing user base weather one of the longest downturns in our nation’s history.”

The most dramatic decrease is in Shopping, where user spending has dropped by more than 40%, which is significant savings in aggregate, but was accomplished by a steady, gradual 3-5% cut each month in a discretionary category where that type of control is possible

Users have also cut spending quarter over quarter in Entertainment (by 24%) and Bills & Utilities (by 16%)

Other categories have fluctuated quarter over quarter based on seasonal shifts, but still show a net decline:

Spending on Gifts and Donations was down 1%, in spite of a 25% spike in Q3 and Q4 with election donations and the holiday season
Automotive spending has seen the broadest swing in spending, with the extreme variance in gas prices in the same time period, but still nets at a 24% decline over the examined quarters.

The only category that has completely recovered is Food & Dining, where spending in Q109 was actually higher than it was a year prior – but just by 2%.

“This data suggests that Mint’s current tools and guidance are working well for our users today,” said Patzer, “But there’s much more opportunity to make budgeting and planning easier and more effective for more Americans. We’ll be introducing new and improved product features and educational content in Q3 and Q4 designed to do just that.”

Economic Recovery Anytime Soon?

As unemployment continues to rise and disposable income drops, no one is anticipating a fast recovery. Consumers have become increasingly concerned for their jobs and are saving rather than spending.

According to market research firm IBISWorld and their latest report on the economic crisis, we can expect the economy to contract overall by 3% in 2009 – the worst decline in more than 50 years. The lowest point may have been reached in the first quarter, and it will not be until 2011 that overall economic activity will surpass 2008 levels.