A Sea Change in Consumer Behaviour
A SEA CHANGE IN CONSUMER BEHAVIOUR
by Paul Cormier, President, Cormier Strategy Advisors Inc.
July 2009
Have you noticed that it is easier to get a table in a good restaurant these days? How about that your exercise class has a few less people in it? Or maybe that it is easier to book that tee time at the golf course? Or maybe you say: I am not doing any of these things anymore. It is natural for consumer spending patterns to shift during recessions and normally these shifts are just temporary. Remember earlier this decade where US retailer Target was nicknamed “Targé” (French pronunciation) by those trading down from Macy’s or Nordstrom’s. By the time the recession was over and the markets began improving, those shoppers were back at Nordstrom’s, returning to their old behaviour.
The current shift in consumer behaviour may be more permanent. This has to do with two primary factors: wealth and demographics. Over the past several decades, personal savings dropped to very low levels. From 1959 to 1992, personal savings rates in the United States were virtually always between 6% and 12% (Canada had similar patterns). This means you spent between 88% and 94% of your personal after-tax income and put aside the rest for retirement or future spending.
Beginning in 1993, things changed dramatically. From 1993 to the present, savings rates have generally ranged between 0% and 6% (Canadian savings rates have been a little higher than the US but followed a similar pattern – except in British Columbia were savings have been negative for a solid decade!). This happened because of a combination of low interest rates (a disincentive to saving), changes to financial regulations which increased access to cheaper financing and increases in personal investment values (first in the stock market and later in housing assets). This increase in wealth caused people to believe they could finance their lifestyles both currently and in retirement without additional savings.
Why is this time different? It is primarily because of the destruction of wealth caused by the simultaneous collapses of the stock market and housing market. According to the US Federal Reserve, the household net worth of Americans fell by a staggering 18% ($11.2 trillion) in 2008 alone. Worldwide wealth is estimated to have dropped by over $50 trillion according to an Asian Development Bank report. To provide context, US wealth destruction during the stock market collapse of 2000-2002 was only about $4 trillion (8%) at its worst point. In recent recessions, housing prices tended to stay stable or even rise as lower interest rates increased affordability and housing demand, buffering losses in the stock markets.
The second big factor is the age of the population. This wealth destruction happened right before the baby boomers were going to start retiring. The Center for Retirement Research at Boston College estimates that even if American retirees annuitize all their financial assets (including home equity), 44% will be unable to maintain their standard living in retirement (61% when health care costs are included).
Long story short, between the declines in the price of houses and stocks, many Americans can no longer afford to live beyond their means. This is not a uniquely American phenomenon – it is a worldwide problem. Individuals need to reduce debt loads and save more money. There are only two ways to do this: a) make more, b) consume less. Even doing this, wealth cannot be replaced overnight. Even with a 6% savings rate and a 4% annual return on assets, it would take about 3 1/2 years just to get back what was lost in 2008!
In recessions of the recent past, savings rates increased, as uncertainty rose, but generally only by a small amount (often around 2 percentage points) until the crisis faded and then they went back to normal. People saw the issue as temporary. This time looks very different. The monthly savings rate in the US ran between 0% and 1% for all but three months between January 2005 and April 2008. By May 2009, it has risen to 5.9%! Household debt in the US has actually declined in the last two quarters. Is this temporary in response to the financial crisis? I don’t think so. The rate of household debt expansion has been falling steadily since the second quarter of 2006. I have looked at US data back to 1955 and there is no parallel and the response is unlike any I can see. Consumers are frightened. They understand the problem and are responding totally rationally.
So what does this mean going forward? Consumers are likely to be much thriftier – you can even find wealthier consumers bragging about how they are saving money now. Here are some trends you are likely to see continue:
Do it yourself instead of pay someone to do it. This helps home improvement retail and auto parts retail; hurts home renovation contractors, auto dealers.
Used cars instead of new cars. Auto dealers will shift focus to higher margin used cars.
Expensive entertainment will continue to suffer (expensive restaurants, high-priced sporting events and expensive recreation activities like golf). Beneficiaries will include those who deliver entertainment to the home (cable companies).
Casinos and lotteries are likely to continue to suffer as people become more reluctant to part with their money on low-return gambling.
A move to less expensive alcoholic beverages (wine to beer) and an overall decline in alcoholic consumption.
A downscaling of retail shoppers. Eventually some of the chains will probably have to re-invent themselves at more affordable levels.
Problems for private clubs (golf, country clubs, athletic clubs) as individuals choose lower costs substitutes.
Less demand for private education as its costs have spiralled significantly over the last decade.
Curtailing of luxury services including spas, beauty salons, pet care, etc.
There is also likely to be increased demands on government to control the price of health services, utilities services, telecommunications and even residential rents.
Financial companies, particularly asset managers, insurance companies and investment brokers should do particularly well in this environment as assets under management grow both from growth in the markets and increased savings rates. It is a great time to be in the financial planning profession.
These changes in consumer behaviour are likely to be longer-term in nature this time and there is money to be made if you recognize this and act on it now.
Paul Cormier is President of Cormier Strategy Advisors Inc., a firm which provides clients with strategic consulting, project management and short-term management services.