The Shift to Thrift
Economic recessions always bring about change in consumer behaviour. Most times this is a little bit like New Year resolutions, well intentioned at the time, but soon they melt away. As things start returning to normal so does consumer behaviour.
Well, in the past that’s what happened. But is it different this time? It is increasingly clear that the current downturn is fundamentally different from previous recessions and that the new normal will not look anything like the old normal. As consumers develop fear about their jobs and future income a major shift to thrift occurs. The question is, will it be longer lasting or permanent this time around?
First of all the amount of wealth destroyed in the developed world by this recession is absolutely vast. Americans alone watched their household wealth shrink by some $13 trillion in 2008, erasing a full decade of gains. In past recessions, according to economist William Cline of the Peterson Institute, households lost about 5% of their net worth compared to 20% on this occasion. That’s not as bad as the great depression where losses were double that amount. But it’s still very high, and similar losses have occurred in the world’s other developed economies. So are we witnessing a big change in a way of life based on freewheeling consumption fuelled by easy credit and the wealth effect of ever rising asset values?
Time Magazine seems to think so, and believes that sometimes we change because we want to, and sometimes we change because we have no choice. In an extensive survey carried out recently 61% of Americans predict they’ll continue to spend less even when prosperity returns.
Some 4 in 10 earning over $100,000 say they are buying more store brands, while sadly but predictably 39% have postponed or cancelled a vacation to save money. Common sense is back in style, meaning people are less willing to buy what they can have for free. Bottled water sales have dropped 10%. The discount shoppers take pride in finding the bargain and cutting the deal, 23% of U.S. consumers are haggling more.
The Pew Research Centre, in a survey last month, found that 8 in 10 adults have taken specific steps to economise during these bad times. Almost 6 in 10 say they are shopping more in discount stores or are passing up brand names in favour of less expensive varieties. And about 20% say they are following Michelle Obama’s example and making plans to plant a vegetable garden.
The survey also found that many Americans are changing their minds about which everyday goods and services they consider essential and which ones they could live without. The highest rating for “must have” goes to the car, at 88%. The clothes dryer is up there next at 66%, though that’s down 17 points since last year. Home air conditioning too has dropped 16 points to 54%, and, believe it or not, the TV has dropped 12 points in a year to 52%. Microwaves and dishwashers also dropped in the necessity ratings, while “new-tech” items more or less held their own, flat screen TV, high speed internet, mobile phones and home computers.
Newsweek has been looking at the UK and report that Sainsbury’s has seen sales of budget items tripling in a year. But, as in every circumstance, opportunity knocks somewhere, and Newsweek also reports that Timpsons, a British repair shop chain, says repairs of shoes and watches have jumped in the last few months. With spending unlikely to fully recover for some time, and with most people forced to save again, Newsweek believes that discount companies like Asda, Walmart, Jet Blue and McDonalds look set to outperform their upmarket rivals for many years to come, as this new age of frugality takes hold.
The era of easy credit appears to be over, and home equity loans, particularly in the U.S, are unlikely to find favour with lenders or borrowers for some time.
Then there is the factor of consumers embracing austerity not just out of necessity but also as something of a fashion, leading the Economist to recently opine that ostentatious parsimony is the new conspicuous consumption.
Following the oil crisis of 1972 and 1978 many consumer surveys predicted the end of the big car era in America. As oil prices moderated however, the love affair with the big car grew and grew, right up to all those SUVs, including the Hummer. And where has it taken the U.S. auto industry? Crysler are in bankruptcy, and General Motors are about to go there. Remember when they used to say, where General Motors go there goes America – let’s hope not. Only Ford seems so far to be getting by without a state bailout. There is little doubt that rescued Crysler and G.M. will have a heavy concentration on producing much smaller fuel efficient “greener” cars than were thought necessary in the 70s and 80s.
A recent study carried out by the Economist Intelligence Unit on behalf of Amadeus Hospitality Business Group concluded that we are entering an age of visible austerity with regard to business travel. Almost half of Executives surveyed will be taking fewer trips in the next 12 months, and more than one quarter expect to downgrade from 4 and 5 star hotels.
In addition, 63% expect their companies to use the economic downturn to extract the best possible rates from hotels.
When asked which features they simply could not do without, business travellers were devoted to productivity on the road: internet connectivity is indispensable to more business travellers (76% of respondents) than a quiet room (56%), good transport links (54%) or central location (52%).
The recession has also triggered a massive boost in savings. In the last year the savings rate in the U.S. (the percentage of after tax income that people do not spend), has risen above 4% from virtually zero (the Chinese, by the way, save about a quarter of what they earn). A recent Gallup poll found that most Americans who have recently increased their savings believe this represents a new normal pattern for years ahead. Most social critics, economists and even many consumers seem to agree that a forced financial conservatism may be for the better.
A recent piece by Ian Davis worldwide Managing Director of McKinsey & Company, predicts a significant regulatory restructuring to come for the financial services sector, and the future will see lower levels of leverage and higher prices for risk. But he believes technological innovation will continue, and the value of increasing human knowledge will remain undiminished.
The good news is, according to McKinsey, that when we finally enter into the post-crisis period, the business and economic context will not have returned to its pre-crisis state. Executives preparing their organizations to succeed in the new normal must focus on what has changed and what remains basically the same for their customers, companies, and industries. The result will be an environment that, while different from the past, is no less rich in possibilities for those who are prepared.
So for now, get used to discounts and good value offerings, they are a way of life that’s here to stay. And that includes, perhaps particularly includes, the tourism and hospitality industry. Newsweek concludes that the shift to thrift which is coursing through the global economy will ultimately be a good thing. “It’s a more boring, slower-growing world. But it’s also a more sustainable one, with fewer imbalances, deficits and nasty economic surprises. Until someone inevitably invents the next big bubble, that is.”
But out of adversity usually comes some good, and the Time survey reports that one third of the people polled say they are spending more time with family and friends, and nearly four times as many people say their relations with their kids have gotten better during this recession than say they have gotten worse. A consumer culture, they conclude, invites us to want more than we can ever have; a culture of thrift invites us to be grateful for whatever we can get.
So will this recession ultimately be remembered by what we lost or what we found?
May 21st 2009
May 21st, 2009 at 12:40 pm
I hope it’s remembered for what we found because the boom was relentless and ultimately unfulfilling for many. The evidence of this is clear to see from its disastrous unravelling with many of its poster boys and girls like Bernard Madoff being exposed for having lived extravagant lies.
No doubt trend setters, marketers and advertisers will attempt to create booms in the future based on fashion, trends and whatever dreams they can invent for everyone. No doubt the buyers and sellers of various commodities and products will try likewise – and on occasion succeed. It’s unlikely though that we’ll see anything on the scale of what’s happened during the last 20-30 years. Because when things do pick up next time round, everyone knows fossil fuel reserves are finite regardless of whether they believe in global warming or mankind’s contribution to it.
The result of this is likely to be an unavoidable emphasis on reducing our reliance on fossil fuels even after the upturn is well underway. A further likelihood is that any upturn will be dampened by rocketing energy prices (they’re already climbing) which in turn will fuel inflation.
The aim should therefore be on a much more gradual and sustainable global upturn that doesn’t raise expectations too high or get out of control. Because there are ample opportunities out there as long as we think differently and adapt to the new environment, and as long as we don‘t try and revert back to business as usual.
May 25th, 2009 at 2:39 pm
I think the topic of Shift to Thrift is a fascinating one. I agree with most of the points made in the article. People definitely don’t want to be seen to be ostentatious. However, it doesn’t mean that people will swing away from enjoying high standards, particularly in the hospitality industry. They will be more conscious that they get value for money. I think that they will opt for the more low key and less ‘bling’ places to stay but with a strong emphasis on feeling welcome and appreciated. Maybe a weekend away where you have to save to pay for it will be a more enjoyable experience. The trend is for people to talk more to each other now. A walk in the park breathing in pure air is just as enjoyable (or more so) than compulsive shopping for unnecessary gimmicks that are unused and cluttering up everybody’s cupboards. I don’t think we need to be parsimonious but back to realising when a treat is a treat and not a daily exercise in self indulgence.
May 25th, 2009 at 3:50 pm
Great research Eamonn and gives broad picture,mainly U.S
Is every market,everywhere in recession ?
Where are the tourism ‘green shoots’?
Markets correction forcing down prices despite rising costs
Viable companies who historically had good business practices are best suited to survive or as Warren Buffet said” when the tide goes out,you know who were swimming naked !”Thrift has always been a virtue,value for money and we must all refocus within this new environment.Cash is King
May 26th, 2009 at 8:48 am
Thrift is the name of the game for many and will be in the immediate future. This is not such a bad thing. The high prices and over spend by all have created the problems facing everyone now. People now seek a value for money deal, all the while maintaining quality. There is an opportunity for Ireland now to offer very good value for money, good service and big welcoming smiles. Lets regain our title ‘ friendliest nation’ and give people a holiday experience to remember. We can do it.
May 26th, 2009 at 10:48 am
Eamonn , great piece on shift to thrift, well done . i would like to share a few thoughts. i think Jane is spot on with a return to the values and behaviours that made us successful, ie a genuine warm welcome , brought about by a sincere desire to welcome visitors to our island . is this a sudden shift to thrift?.not so sure … we all got carried away . inherently in the past we did more with less , in the past our natural behaviour was not to look ostentatious , we worked to very tight budgets in our daily lives. We are now returning to our natural behaviour.
There will be a big focus on ethical standards . There will be an overhaul of what is considered ethical and acceptable .more areas will be scrutinized by the public than before . Companies will not be allowed to behave as they did in the past . entertainment and corporate hospitality will be under huge pressure as companies will work to a predetermined code of ethics/Conduct . America brought most of the big corporatre scandals onto the world and now they have drawn up very strict code of behaviours for all their corporations and worldwide subsideries . Unfortunately this will have serious implications for our industry here in ireland .
in the 1990′s after the financial bubble expolded it destroyed generations of YUPPIES (REMEMBER THEM ) As a consequence we had a decade of new age and the new class of Bourgeois-Bohemiens emerged. This current phase will be deeper and longer lasting and it will be interesting to see how we restructure ourselves , we are in a new era of change that needs time to see what emerges. In my opinion the new direction will come from the USA and it will be across all social classes . i expect to see a whole range of new trends emerging . The trick for us is to get ahead of the curve and be shapers of tends rather than followers .
May 26th, 2009 at 3:48 pm
People have short memories. Give a year or so and they will put the recession of 2008/2009 behind them.The lure of international travel remains strong and will drive growth once more.The next big travel year will be 2012, when the Olympic games will be hosted in London. That feel-good factor will get people travelling again. Recovery in the meantime will be gradual however.
May 26th, 2009 at 8:21 pm
Our shift to thrift has been helped by the Green Hospitality initiatives which many hotels and catering organisations are availing of around the country. Green Tourism has a part to play with these green shoots that are so topical at the moment.
The US based tourism industry guys are correct with their encouragement for more marketing, keeping our eye on value and driving confidence on their ITIC video statements.
The Volvo Race stopover in Galway is another good example of how we can promote a world class event in our own West of Ireland way of doing things. Loads of happy media people there to tell good stories about the welcome and buzz in this great city.
The east coast will not be out done either, the 02 at the Point and new conference centre opening next March got a great introduction on last Friday’s Late Late…. Green shoots in the making…
May 26th, 2009 at 8:31 pm
I agree with voyager regarding ‘short memories’ and ’the lure for international travel driving growth‘. I also agree with clementinebaby however, regarding finite fossil fuels. When the upturn comes fuel prices are likely to rise rapidly again which will put additional pressure on an airline industry that‘s already under the kosh. As a result air fares will only go in one direction – and that’s UP. The global economy and travel/tourism industry are going to have adapt to this new environment, and Ireland in particular as an island nation is going to have to adapt more than most.
May 26th, 2009 at 8:35 pm
I would agree with voyager – two more years of gradual recovery – I’m on the road all over Ireland staying in about 15-20 hotels a month and its fascinating to see the variety of responses to this recession – reminds me of the old saying that there are 3 types of people – those that make things happen, those that watch things happen and those that wonder what the hell happened? Those that will survive are not afraid to seek a bargain and to get the best value available – whether a customer or supplier.
Some businesses are accepting things are tough and they are adapting – they prepare budgets based on reduced average room rate and occupancy and can very quickly work out their breakeven point. How many places actually know their breakeven point? Not that many and you would be surprised how many are operating on “gut” feeling – well here it is people – if you don’t understand your costs, breakeven and contribution you are in danger of going out of business. Cash flow is another area that so many operators confuse with a P&L statement – remember that cash is king and you can only run out of cash once and your business is gone!
The point is that you must understand what the effect of reducing your average room rate will have on your bottom line and how a €1 drop in rate can reduce your profitability by between 50% – 100%. I would suggest to anyone reading this that does not know their basic breakeven point and profitability factors to get help an fast! Failte Ireland are offering an excellent Mentoring and Coaching Service where you can have a specialist come into your business and help you with understanding your finances better and ultimately improve your profitability. Lets be honest we are not in business to breakeven or to make a loss so if you understand your costs then you will understand your business.
Only then can you start to take advantage of those green shoots and be ready for the inevitable upturn when it comes. Thrifty customers have already become the norm so my suggestion is to forget the “good old days” of high average rates and to concentrate on the things that are important like value, service and most of all a smile! Remember its very hard for a customer to give out to you when you are smiling and genuinely trying to provide good service!
May 27th, 2009 at 1:44 pm
Seems to me based on all of the stats and reports quoted in this peice that for one reports are mirroring the realiities of the situation that the vast majority of consumers are experiencing globally. I complete concurr with Weldons points of businesses knowing and understanding their breakeven point but while its easy to say prepare budgets based on the realities of the situation and markets it has to be said that never before have business been faced with trying to prepare budgets based on occupancies that simply are not there or forward booking that have and continue to reduce month on month. The level of business now booking in the month or even a couple of weeks before travel makes it almost impossible to project with any degree of accuracy – yes costs can be substantially cut but there is no doubt that service will be compromised when having to operate a business with minimum staffing numbers. The consumer wants value and rightly so but realistically can’t expect to get 4 star service when businesses are having to reduce staffling levels to a basic three star level. Right now for many hospitality enterprises its about staying in business and solvancy has replaced the goal of achieving profit. There is however no doubt that businesses who deliver a smile and appreciation of their customers business will get through these challenging time and will come out the other side. Giving the customer added value that might encourage additional spend or repeat custom and favorable word of mouth reviews will benefit and recover when the green shoots become blooms!!
June 2nd, 2009 at 10:23 am
It is a complete collapse in consumer confidence. If the event is right the people will cme out. Just look at Galway for the past few days.