Booz & Company Partner Nick Hodson said, “The new frugality that consumers reported last year – one that requires trade-offs between price, brand and convenience – has become dominant and ingrained behavior in several categories. Consumer products companies and retailers need to monitor and understand the evolving behaviors of different consumer segments and respond to each, category by category. Going back to business as usual is not an option.”
Cutbacks on Discretionary Spending and Trading Down on Essentials Continue
According to the survey, cutbacks on both discretionary spending and essentials this year were again significant, and even greater than the previous year:
- On consumer electronics, 56% of respondents reduced expenditures vs. 53% in 2009
- On health and beauty, 28% cut back spending vs. 25% in 2009
- On household products, 28% reduced spending vs. 21% in 2009
- On food at home, 28% cut back on expenditures vs. 23% in 2009
Consumers also continue to trade down on essentials by switching to less expensive brands. For example, this year’s survey found that 39% continue to trade down on household products and 37% said they traded down on food at home, similar levels compared to last year’s survey.
Spending Behaviors Vary Among Consumer Segments; More Affluent Less Likely to Trade Down
While U.S. consumers across the board continue to economize overall, spending behaviors are seen to vary among consumer segments. For example, more affluent consumers continue to defer purchases of discretionary items, but are not necessarily trading down in terms of price or prestige when they do buy. Conversely, less affluent consumers (those with household incomes less than $100,000 per year) are more likely to reduce spending by trading down. According to the findings:
- Approximately 55% of respondents said they had reduced their expenditures in discretionary categories such as consumer electronics and apparel during the past 12 months.
- In non-discretionary categories, less affluent consumers were much more likely to trade down in brands or prestige than more affluent consumers. In household products, for example, 41% of less wealthy consumers traded down to cut spending last year, while only 30% of more affluent consumers took that step.
Economic Uncertainty Continues
Marcelo Tau, Principal at Booz & Company, said, “Consumers continue to pay down debt and build up their savings. There is little reason to believe that consumers will give up their frugal behaviors in the short term. Consumers remain cautious, especially following their disappointment with the slow pace of improvement over the past year.”
One third of consumers in 2009’s study expected to be better off in the coming year, and only 14% of the 2010 respondents reported financial gains. Approximately one third of consumers expect that their financial situation will improve in the coming year, a level of optimism similar to 2009.
Even optimistic consumers (those who think they will be better off next year) show little tendency to increase expenditures. In fact, less than 10% of all optimistic consumers surveyed plan to trade up in brands and only 15% plan to spend more in discretionary categories, despite having deferred purchases for roughly two years already.
“Unpunished Experimentation” Tends to Make Purchasing Behaviors Persist; Dramatic Increase Seen in Searching for Bargains Online
According to Booz & Company’s analysis of the survey results, newly frugal purchasing behaviors are most likely to persist in those categories where consumers felt that their frugal behavior was “unpunished.” For example, run ups in gas prices cause consumers to switch to lower-priced gasoline brands, but when gas prices fall they see little point in switching back as their cars continue to run reliably. This behavior is called “unpunished experimentation” and tends to stick even after economic conditions improve.
Online shopping has greatly benefited from this unpunished experimentation. As cash-strapped consumers searched for bargains during the recession, they discovered convenience and often lower prices available on the Internet. The study showed that the number of consumers who are most inclined to shop online across multiple categories doubled – increasing from 16% in 2009 to 32% in the current survey. It also showed a dramatic increase – rising from 11% last year to 23% this year – in the percentage of consumers using the online channel to research before making a purchase offline.
Another good example of unpunished experimentation is private label items at the supermarket. Private label penetration has grown from 15% before the recession to more than 18% of total sales in 2010. When the economy rebounds, we expect private label sales will remain strong and branded consumer packaged goods may find it difficult to regain their lost market share.
In contrast, some frugal behaviors are not likely to stick as conditions improve. In discretionary categories including apparel, cosmetics, and alcoholic beverages, consumers often found that switching to cheaper brands was an undesirable trade-off and plan to switch back post-economic recovery.
