The New U.S. Consumer: A Quantitative View of Shopping & Consumption Behavior

After two decades of U.S. expanding spending and consumption, fueled by exceptional access to credit, consumers appear to be adapting to emerging economic conditions. Employment security has been eroding over the past several years, with the negative trends accelerating during the 2007-2009 recession. For the first time in recent memory, deep-rooted financial concerns extend to the middle and upper middle segments of the population.

Families with children are clearly the most adversely impacted population segment, as they are proving unable to balance income levels and household expenses. Even as we emerge from the worst recession since the 1930s, there is substantial evidence that the texture of the recovery ahead will be materially different from that of the past. Spending on discretionary and semi-discretionary products and services continues to show significant weakness. Saving rates are at multi-decade highs, reversing long term declining trends.

In 2010, SMS completed an industry leading study to uncover emerging shopping behavior of the U.S. consumer. The New Consumer Research (NCR) framework was based on a large-scale survey of 8,500 respondents. We asked detailed questions pertaining to consumers’ current and expected future needs, attitudes and shopping behaviors. Respondents were segmented based on several economic factors to determine the impact of recession on their purchase behavior. Consumer choice models were developed to accurately estimate the key purchase drivers across products and consumer segments.

KEY FINDINGS

Brand Matters: The most important insight from the first phase of the NCR project is that even in the midst of the most difficult economic environment in three generations, major brands in the U.S. continue to influence consumers across a vast majority of the population base. Despite the challenging economic environment, brand and product attributes continue to be the key drivers of consumer purchase decisions. Consumers place at least 30% more importance on brand and product attributes than on price. Yet, price is also important for consumers as it is the second most important driver of the purchase decision.

Private Label Growth Will Slow: While U.S. Private Label shares in the CPG industry increased from 14 points to 17.5 points, our research showed that consumers were more likely to remain loyal to their preferred brands or basket of brands. In the current consumer environment, 45% to 50% of all Private Label purchase decisions are based on price. For major national brands, 23% to 33% of purchase decisions are made based on price. These key findings suggest that Private Label cannot compete with Brands solely on price and price alone. Therefore, any continuation of Private Label over-performance will likely require improvements in product quality, communication strategy (e.g. advertising) and retail presence.

Most Retail Switching Has Already Occurred. Only 10% of total U.S. population will incrementally alter their shopping trip based on value. Surprisingly, this group skewed more towards the higher income groups. Perhaps more importantly, consumers most impacted by the recession are more likely to gravitate towards the Dollar channel primarily because this channel offers better value. The combination of these dynamics may place a ceiling in growth rates for major U.S. Mass Merchandisers.

WHAT’S NEXT

SMS monitors three economic indicators as predictors of future purchasing and consumption behavior: employment outlook, consumer confidence, and housing. After improvements in 2009 following the stabilization of financial markets, in 2010 all three variables have deteriorated significantly.

In the current economic environment, major retailers are focused on offering value to attract an increasing number of economically stressed consumers, despite overwhelming evidence of brand trust and preference. Aggressive price discounting and promotions are already increasing price sensitivity and incentivizing consumers to buy on deal. These activities are resetting critical reference price points for major brands at artificially low levels. Recovery from these levels is likely to require extensive advertising and the elimination of deep discounting.

Retailers are unlikely to abandon their quest for value and most manufacturers may not have the financial flexibility to materially increase advertising spending required to reduce price sensitivity. The combination of these factors and the continuation of a slow U.S. economy are likely to apply pricing pressure in the consumer goods markets.