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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

Near-term Changes in Consumer Behavior

Let us be most clear.

Our data, like everyone else’s, demonstrate obvious changes in consumer attitudes, opinions and behavior in the direction of fiscal responsibility, thrift and frugality in the CPG, grocery and restaurant arenas. Consumers have become more price sensitive. Coupon collecting and redemption is up. Consumers are relying on more channels. Consumers are turning increasingly to private label. All of these shifts represent a way to further economize at the household level during these “most trying of times.” In this, there is a near unanimity of opinion from marketer, analyst and journalist alike.

Where we differ from this common sentiment is in our interpretation. Specifically, our data suggest that these behaviors are driven not as much by outright need as they are a desire to retain some element of control over a economic situation that is largely out of their hands.

Indeed, only a small fraction of consumers we have studied were enacting these behaviors out of necessity, and most could not even explain where any savings accrued through these behaviors were being directed. This finding is further strengthened by the fact that spending on food accounts for only 12% of household expenditures—with 7% at grocery and 5% at restaurant. So if a typical American family with the US median income of $58,000 were to shave 40% off of their grocery bill—which is no small feat—the overall annual savings accrued would be about $1,600, or 3% of household income. This figure is, as they say, “nothing to sneer at,” but it remains an inefficient means of making ends meet. Put another way, when one considers all of the time and effort spent trying to shave 40% off of one’s food costs, it becomes clear that there are far more efficient ways to generate an extra $1,600 of household income in a fiscal year.

So because the majority of these behaviors are born not out of necessity but, rather, out of a desire to gain a sense of control over the economic turbulence, we see no reason to believe that the behaviors in question will gain permanent traction if the economy returns to a state of relative stability.

Additionally, because the vast, vast majority of consumers are unable to clearly identify where such accrued savings are being redirected in the household budget, there will be little incentive to keep devoting such time and attention to thrift-seeking behavior in the food and restaurant arenas.

Bottom line takeaway: All of the data—our own as well as most other’s—point to numerous near-term behaviors in the direction of thrift and economy. Consumers are more price sensitive than in recent memory. But these behaviors are driven largely by emotional reactions to economic instabilities and not by need. Hence we see little reason to believe such behaviors will gain any long-term traction.

The Notion of Value with regard to the Post-Recovery Consumer

Most of the recent dialogue concerning consumers and their thrifty ways refers to a “value” consumer. But few, if any, have ever bothered to explain what they really mean when invoking the term “value.” This becomes all the more puzzling when you consider that most college econ textbooks define value as “the price someone is willing to pay for a good or service in the marketplace.” Going strictly by the book, then, everyone is a value consumer. Clearly something is amiss.

By taking a closer look at the context within which analysts and marketers have been recently invoking the term, we believe they are referring to a consumer who strongly favors lower prices and functionality, presumably with some sacrifices in terms of taste, quality or desirability. Typical pronouncements read like these two:

“At the end of the day, smart leading brands are engaging consumers in a new value conversation.”

“This newly conservative shopper demands solutions that help them feed, clothe and take care of their families based on a new definition of value.”

However one chooses to interpret the intent, the implication is that something has somehow changed in the consumer’s value equation such that price and functionality have begun to replace other desires.

Puzzled by these claims, as well as the lack of any kind of supporting evidence, we decided to investigate this phenomenon through direct research. In a recent survey to nationally representative sample of 1,000 consumers we asked the following: How important are each of the following when trying to evaluate a given product or services value?

As we see from the results above, quality—as defined by works well/tastes good—is the most important benchmark, followed by notions of consumption and/or waste. Interestingly price does not emerge as a relevant factor until we reach the sixth item on the scale.

It is important to note here that the question addressed value at a general level, and is not specific to different categories. So, for example, we would expect this equation to vary as we moved from automobiles to television sets to frozen meals.

Likewise, our research in this arena has only begun, as we expect to be examining these critically important definitions in much more exacting detail across categories and over time in the years to come.

But from a near-term perspective and based on our most recent data, we must conclude that if there is a "new value conversation" or a "new value consumer," the value equation is focused most keenly on issues of quality, product usage and consumption rather than price. We recognize this finding is in opposition to much of the current collective wisdom in marketing and analyst circles. From our perspective it should serve as an informed base to frame further discussion, of which much has already begun—albeit with little empirical specificity.

Bottom line takeaway: While there has been much discussion in marketing and analyst arenas about “a new definition of value,” “a new value equation,” or a “new value consumer,” few have specified what they mean by this new notion of value. To gain further insight, we addressed this question with consumer data drawn from a sample of 1,000 consumers. The results suggest that if there is a new value equation, it is about quality, consumption/usage and waste. Price enters the value equation as a relative lower order factor. While this finding is in opposition with current conventional thinking, we choose to frame our opinion in the hands of the data, which we plan on exploring in more exacting detail in the months and years to come. We welcome further conversation on these matters and would love to compare/contrast our findings to those of other interested parties.

The Upshot:

We believe the biggest challenge facing the marketing and analyst community is to resist the temptation to look out upon the world around us and make common sense assumptions. While we at the Hartman Group do not fancy ourselves scientists, we often invoke some version of the null hypothesis when asking important questions of the world around us. By nature, we make no assumptions that the recession has had any impact on consumers and then look for compelling data that convinces us otherwise. To be certain we have encountered such data, though not nearly as often as many of our colleagues and competitors seem to find. We welcome continued dialogue and debate on these matters and would encourage our readers to weigh the benefits of a healthy skepticism against the costs associated with making continued, common sense assumptions.

Postscript: While we were preparing this POV we were as surprised as no doubt many others to find that Walmart’s recent financials revealed a fourth quarter same-store sales drop of 1.6%. Meanwhile Whole Foods announced that same-store sales were up 2.5% in the last quarter, with first quarter profits up 79% over the same period last year. We obviously recognize that these are merely two recent data points amid a continuously evolving story of consumer and economy, but they should at least be enough to give one reason to begin to question the common chorus of frugality, doom and gloom.

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