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03.10.2010

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New Value Paradigm: Theatrics of Thrift

The New Value Paradigm provides a provocative, consumer-centric explanation for what to expect from consumer and shopper behaviors as we take the slow path toward economic recovery. The report provides the new consumer understanding for “value” and its implications for CPG companies and food retailers.

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On Frugality, Value & The Post Recovery Consumer

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EDITOR'S NOTE: Due to the critical importance and necessary timeliness of this subject, we have chosen to offer this highly condensed, quickly digestible version of our upcoming POV whitepaper on the subject. We strongly urge readers to consider the more comprehensive, detailed version, which will be published in the coming weeks.

There is little question that ongoing dialogues at the intersection of the economy and consumer behavior continue to command our attention as analysts, journalists and marketers alike. Nearly everything written about consumer behavior these days is framed around—or directly address—issues related to the ongoing economic struggles. What follows is a Hartman Group POV distilled from primary syndicated research, as well as comprehensive analyses of internal intellectual capital, secondary data sources and historical data.

The Dawning of a New Age of Frugality?

One of the most vexing challenges we have faced in trying to communicate our POV on the current economy has to do with the distinction between short-term shifts in consumer attitudes, opinions and behaviors and longer-term trends in macro-economic behavior. The two have surprisingly little in common. Many analysts and journalists make the critical mistake of assuming that responses to survey questions are indicative of a prolonged sea change of consumer sentiment. Consider the following example culled from an analyst brief:

Frugal behavior is now considered trendy by many shoppers, and will continue for years to come. Evidence of changed consumer attitudes abounds, with more than half (55%) saying they would rather get the best price than the best brand.

To be certain, our data—like everyone else’s—show similar short-term changes in the direction of thriftiness, but nothing in the above finding suggests anything about “behavior…for years to come.”

So to assess behavior for years to come—and begin to make reasoned inferences about future consumer spending patterns—one would need to look carefully at historical patterns in macroeconomic data.

So what are these patterns, precisely?

Consider the following graph compiled from the Archive of Federal Reserve Economic Data¹. The blue line represents personal spending (personal consumption expenditures) expressed in constant 2005 dollars, while the green line represents the overall savings rate. The gray areas represent the five recessionary periods from 1976 to the present.

The first takeaway here is that the trend toward higher spending rates and lower savings is quite strong across the past 35 years—almost a perfect 1:1 correlation in the case of personal spending. The other point is that while the two trends diverge ever so slightly from their respective pathways during periods of recession (gray bars), they have always returned to their trending lines. For example, during the protracted recessionary periods of 1979 thru 1983, consumer spending flattened and savings rates spiked by about nine percent before returning to their generalized pattern.

In the most recent recession, savings rates underwent noticeable lift, while consumer spending hit the largest net loss in many years. While the spikes in the general trend lines might spark initial concern, there is no historical evidence to suggest these long-term trend lines will begin to reverse themselves. And as the graph suggests, spending rates for the year 2009 have almost returned to what they were in pre-recessionary levels of 2006, an observation shared by James Surowiecki's article, Inconspicuous Consumption, in The New Yorker (10.12.2009).

As one might suspect, the recovery scenarios sketched by leading economists, while detailed and varied share the general agreement that consumers will eventually fall back into their traditional spending patterns, that the trending trajectories above will return to their expected pathways, and quite simply, we have not entered a New Era of Frugality.

We at the Hartman Group echo that perspective, with one caveat.

While we do not foresee a “New Era of Frugality” in terms of a consumer spirit or mindset (i.e., a philosophical approach to consumer spending), we cannot rule out the possibility of a protracted lull in consumer spending as a byproduct of reduced access to credit. Access to unsecured credit dropped precipitously after the financial meltdown, and while it is gradually recovering, nobody can predict what levels it will return to. Ditto for a severely depressed housing market. With plummeting housing values and reduced equity ratios, consumers will find it much more difficult to keep relying on their home and its equity as a virtual ATM machine.

The bottom line here is that we may well witness reduced levels of consumer spending in the near-term future not by choice, but by force. While the net effect is real, it does not suggest a change in overall philosophical orientation as per a new frugality. Only time will sort out these effects.

As for readers who have a more focused interest in the food, CPG and restaurant sectors, we have strong reasons to believe that even if the above effects serve to limit consumer spending in the near term, the effects on food and restaurant spend will be minimal to nonexistent. Having one’s credit limit reduced might make it harder to vacation in Mexico, but it is not likely to have any effect on one’s beverage choices.

Bottom line takeaway: Reports of current consumer shopping behavior or attitudes have almost nothing to do with macro-economic trends in consumer spending. The proper data suggest that (a) there has never been an era of frugality, and that (b) we are not headed for such an era.

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