Tuesday, October 14, 2008

SPECIAL REPORT ON THE ECONOMY: How To Woo Consumers In The Middle Of An Economic Firestorm

Part 1
How The Post-Bailout Economy Will Change Consumer Behavior

By Kevin McIntosh

The "I'm in debt up to my eyeballs" TV spot by Mullen for Lending Tree parodies the plight of the consumer.

The Post-Bailout Economy. The New Deal Part 2. The Great Depression 2.0. Whatever you want to call life after September of 2008, the U.S. and other countries are about to go through some serious changes. We have witnessed the financial crisis, but we are just beginning to see its effects on the economy.

Like trying to get off of an addictive drug, U.S. consumers and others in the world will struggle to kick the habit of spending more than they make. But with increasing job losses, record foreclosures and a tighter credit market, change will happen. There will be no choice for millions but to drastically cut back on their spending.

Perhaps the scariest thing to think about is the ripple effect the cutbacks in consumer spending will have. After all, the economy is dependent on consumer spending for two-thirds of its input.

As marketers scramble to compete for the consumer dollar, understanding the new changes in consumer behavior will be critical.

Dramatic Shifts In Consumer Spending Ahead

Credit card balances are up more than $125 billion over just 3 years ago, according to Consumer Reports. Personal consumption in the U.S. has soared since 1990 from around $5 trillion to over $8 trillion. Americans have over $2.6 trillion in personal debt.

The threats of tightening credit have shaken up consumers. A survey by Reuters/University of Michigan Surveys of Consumers released on October 10th reports that 57 percent of U.S. consumers surveyed reported having lower confidence now in the Fed than five years ago.

It’s expected that the decrease in confidence will accelerate spending cutbacks and those reductions are likely to persist through most of 2009. It's anticipated the cutbacks will be the greatest in three decades.

In fact, the results of a new online poll of 507 consumers by WPP Group-owned Lightspeed Research for Advertising Age found that nearly 80% of respondents have already changed their buying behavior in the past few weeks.

Before the financial crisis, the spending of millions was only limited by their overly generous credit lines. But soon, their spending will be limited to what they have in their checking accounts, as the credit pipeline will be drastically curtailed. And due to poor saving habits, many consumers will not have any savings to tap into.

In the past, consumer spending usually bounced back with the recession. Given the deepness of this recession, it's likely that it will be much longer before consumer spending levels return to where they've been.

Necessity Will Drive Purchases More Than Desire

More and more purchases will be made based on necessity rather than desire. Price will outweigh sleek design. In fact, price may start to outweigh other product and service benefits.

For example, in the effort to make household budgets go further, many Target brand shoppers may now become Wal-Mart brand shoppers, though Target’s average prices fall within 1-2% of Wal-Mart prices. Nashville-based Dollar General stores should also see an increase in new customers.

This recession is affecting upper-class consumers as well. In a recent survey from American Express Publishing and the Harrison Group, 69% of the respondents with incomes over $250,000, agreed with the statement, “The recent real estate and banking crisis has affected my sense of financial security.” Nearly half said that they worry that at some point they’ll run out of money.

So as the affluent look to cut their costs, Target could win new consumers over from upper-scale stores such as Nordstrom and Neiman Marcus.

While some consumers will retain strong incomes, there will be less discretionary income due to inflation and the resulting rising prices for necessities like food and fuel.

As necessity begins to drive spending habits, impulse spending will be less likely. The main impulse will be to not spend.

Luxury spending on things such as jewelry and travel will see a huge drop-off.

Entertainment spending on things such as sports events and dining will decrease significantly as well. In a recent survey of nearly 1,000 households by Booz and Co., 43% of respondents said they are eating at home more and 25% said they were cutting spending on hobbies and sports activities. In both cases, most said they'd continue doing so even when the economy improves.

Of course, marketers of big-ticket items such as appliances, luxury electronics and autos will face big challenges. Now, many consumers will have trouble getting the credit to purchase these goods.

As discretionary income gets smaller, it will be interesting to note what changes in media habits we’ll see, because consumers will have to decide between necessity and luxury.

In times past, if finances got tight, people would cut cable TV services and newspaper delivery. Now, what will they cut? The Internet? Texting? Or even basic mobile phone services?

Buying Used Instead Of New

Tight credit will force more consumers to shop for used cars and perhaps even used furniture and appliances instead of new ones. Of course, that may only come after all repair options have been exhausted. For those who hang on to their Internet service, Craigslist could become a key brand for finding great deals on used goods.

Consignment shops and Goodwill stores could also see an increase in business, as more shoppers seek to save money on clothing purchases.

Less Plowing Through The Grocery, More Plowing Through The Garden

The rising cost of food is driving more people to participate in community gardens. In Portland and Boston, there are already waiting lists with hundreds of people to get plots at community gardens. While the trend may not yet seem substantial, we may see more community gardens and more home gardening springing up nationwide as consumers seek to save on food prices.

Delaying Health Care Spending

In a survey by the National Association of Insurance Commissioners in August, 22 percent of 686 consumers said that economy-related woes were causing them to go to the doctor less often. About 11 percent said they have scaled back on prescription drugs to save money.

The soaring costs in health care and the fact that over 46 million Americans are already living without health care coverage only makes matters worse. Plus it’s all but certain that the ranks of the uninsured will continue to grow, especially as unemployment rises due to the recession.

The scary part is that the consequences of these delays on health care spending may result in even greater health care expenses down the road. Like a car that needs repairs, the longer the problem goes unmanaged, the worse it usually gets.

Reality Check

The Post Bailout Economy is already changing consumer behavior. And the changes are likely to last longer than the recession. So the question for anyone marketing to consumers is, “How do you talk to consumers in the Post-Bailout Economy?”

--Kevin McIntosh

Coming in a few days, How Marketers Should Talk To Consumers In The Post Bailout Economy

Kevin McIntosh is a freelance copywriter in the Nashville market. His work can be seen at www.KevinMcIntosh.com


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