Will consumer spending patterns change?

While consumer confidence is at its highest level since November 2008, that doesn’t mean consumers are spending more. According to a new Rabobank podcast, consumers, who once focused on premium products, now place a premium on value – and are unlikely to revert once the recession recovers.

“An economic recovery would help loosen up consumer purse strings, and improve some of the consumer confidence levels,” said Rabobank’s Food & Agribusiness Research and Advisory (FAR) executive director Stephen Rannekleiv. “But many of the pre-recession spending trends were somewhat unsustainable. I think consumers have changed.”

In the podcast,  Rannekleiv discusses how the economy has altered buying habits – creating more price sensitive consumers, who are looking for less expensive alternatives, reducing spending and increasingly using coupons. However, the key becomes whether these trends are secular, in other words permanent; or cyclical, meaning likely to revert to previous patterns once the economy improves.  (The full podcast is available online at rabobankamerica.com/rabocast or directly at http://news.rabobankamerica.com/pr/rb/electronic/rabocast_consumerbehavior_v1.mp3.)

“This increased price sensitivity of consumers comes on the heels of an unprecedented trend of trading up. Where you saw consumers willing to spend more for small luxuries and premium products,” said Rannekleiv.

“The problem comes in the investments that were made to take advantage of these trading up trends,” said Rannekleiv.

While consumers were trading up, companies were able to profit from investments in acquisitions, as well as brand positioning and image. However, with consumers migrating to less expensive options, returns on those investments are now not meeting expectations. How companies respond – whether waiting out the down turn or making changes to their products and brand position to become more value oriented – depends on whether they believe the recession is cyclical or secular.

“(However) those views can be somewhat fluid as more information becomes available, as the recession drags on, and as we see these trends continue,” said Rannekleiv.

For example, one food retailer invested in improving the consumer shopping experience and expanded their premium product mix – taking advantage of the premiumization trends in order to differentiate themselves from low-cost retailers. Because this investment had proven so successful, their initial response was to wait out the downturn. However, as the recession lingered, they have become more aggressive in their pricing in order to maintain their customer base.

 “Food and beverage companies need to be prepared for more frugality from consumers,” said Rannekleiv, who estimates that frugality could be an important consumer trend for the next five years.

In addition to higher unemployment rates, much of this change can be attributed to the loss of wealth U.S. households have experienced from the declining stock market and housing values. From the third quarter of 2007 to the fourth quarter of 2008, U.S. households have lost nearly 20% of their wealth and those losses continue to decline.

“Moving forward, consumers are starting to replace some of that lost wealth by increasing their savings, and some of this increase in savings is often cited in one of the causes in the dip in consumer spending,” said Rannekleiv.

Savings rates had dipped to unsustainable lows before the recession – reaching into negative numbers in 2005. Today, that number is around 4%, but still less than half of savings rates in the 1980s (around 9%).

“I think this increase in savings rate is something we can expect longer term, and wouldn’t expect it to drop dramatically any time soon,” said Rannekleiv. “So, I think we can expect this to stay on as a more permanent trend.”

As the economy turns around, consumer confidence may increase further and the level of spending may also increase. However, we may not return to past levels of spending.

“Even an improvement in the economy may bring back consumer confidence, but I don’t think … a strong level of consumer confidence (will) bring back some of those spending patterns prior to this recession,” said Rannekleiv. “I think consumers have changed.”

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