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