Consumers Trade Down, At Least For Now

Ken’s Take: Insightful article re: how consumers are (and will) react to the economic downturn.

Key ideas: downward mobility, cautionary spending, renter mentality.

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Excerpted from Knowledge @ Wharton, “The Shopper of Tomorrow: Trading Down”, Feb 18, 2009

Attention Shoppers: We no longer have the following items — “a sense of entitlement,” “conspicuous consumption” and “a golden period of luxury.” At least that is the word from Wharton faculty and other experts who point to a new logic that is defining not just what U.S. consumers buy, but how they view the shopping experience.

While shoppers typically pull back during the downward phase of any economic cycle, the severity and uncertainty of today’s crisis is likely to have longer-lasting effects on their attitudes than most slumps, these experts note. Consumers, they suggest, will eventually start spending again, but without the vigor enabled by easy credit in the Roaring 2000s …

Over the next 18 months … consumers will learn to become more frugal and are likely to carry those skills over once the economy recovers. “At some level, everybody has now been schooled about financial markets and overextending one’s credit — something American consumers have been notoriously bad at. We had a habit of not paying a lot of attention to the cost of using borrowed money” …

In the future, shoppers will learn to focus on the value of goods and services … [the] “crazy mindset” is over and shoppers are only willing to pay for what they absolutely need or items that present extraordinary value. … As for the pre-meltdown “go-go times, we will never go back to that, at least not anytime soon.”

According to consumer consultant Paco Underhill … [there] are three consumer segments now, divided not by income levels, but by income security. One group is made up of those who have lost their jobs and are downwardly mobile. For the wife of a Wall Street banker, that could result in the elimination of weekly hair and nail appointments … Those in the second group are not at immediate risk of losing their jobs, but they have friends or family who are out of work. These consumers, he says, are cutting back as a cautionary measureA third group is relatively untouched by the downturn. The individuals in this group have paid off their mortgages and, while their investment portfolios may be down sharply, they still have an adequate cushion. Nonetheless this group is also cutting back because engaging in conspicuous consumption seems like bad manners …

Armendinger points to another impact on shopping patterns — having enough space to store all one’s purchases. U.S. shoppers do seem to lead the world in consumerism, in part because they have enough land to build huge homes and storage units to house all their belongings … In Europe and emerging economies such as India … “You don’t see the Costco mentality of stockpiling toilet paper or huge vats of ketchup, simply because [people] physically don’t have the space.”

Carl Steidtmann, chief economist and director of Deloitte Research emphasizes that the Great Depression, combined with World War II, amounted to a 15-year period of consumer constraint, first because of the economic contraction and then because of rationing for the war effort. He predicts that the current downturn, which began in December 2007, will start to abate by the end of this year, and is not likely to have as great a long-term impact on consumers as the Great Depression.

He also suggests that the most lasting impact of the current downturn may be on homeowners who are severely stressed by mortgage debt. Going forward, he expects more of a “renter mentality” in the housing market, with less emphasis on homeownership as an investment vehicle …

 

Wharton marketing professor David Reibstein says the current angst about consumer spending reminds him of the periods of recession in 2001 and 1991. At both extremes of any economic cycle — the highs and the lows — conventional wisdom holds that during the highs, everyone feels the status quo will continue, while during the lows, everyone feels that life as we know it has forever changed. “While we’re in the midst of it, there’s always that concern … What’s amazing to me is how resilient we are.”

Reibstein points to the … terror attacks on September 11, 2001, when it seemed no one would ever have the courage to board an aircraft again. By the time the current financial crisis reduced demand, air travel volume had recovered. “It’s going to take a long time for us to get through this because of the severity and depth of this cycle … but once we do, it will be amazing how quickly people do rebound.”

Gradually, he adds, as the recent shocks to the economy are absorbed, people will begin to reinvest and cautiously step up purchases. Confidence will improve even more as job losses stabilize and hiring begins again, he says. “It’s only going to take time.”

Edit by SAC

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Full Article:
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2161

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