December 12, 2008
Turning Points 2008: The Price Point is Right
Commentary by Bernice
Hurst, Managing Partner, Fine Food Network
Editor’s
note: In what we plan to make an annual end-of-year tradition, RetailWire
has compiled a list of the most significant retail industry "Turning
Points" of 2008. (See our news release…)
What follows is the third of a series of 12 discussions based on the
list.
Manufacturers, mindful
of decreased consumer purchasing power and the need to protect corporate
margins, have tried a combination of tactics including multi-stage price
increases and package downsizing.
In some ways, though,
it’s all about semantics. Economics and the economy may be blind spots
for many consumers but they all understand having to economize. The meanings
manufacturers and retailers try to communicate don’t always match consumer
understanding. Words such as
"value" and "cheap", "promotions" and
"sales", "profits" and "dividends" influence,
and are influenced by, changes in what people buy and where. What retailers
offer, and what consumers seek, are not always the same.
Perception and fear are
factors as much as actuality. Whether recession has hit a specific home
or not, most people are reducing their outgoings in anticipation that it
might. As prices of food (and fuel) went up during the year, amid concerns
that they would not be reversed any time soon, alternative shopping patterns
quickly emerged.
Many manufacturers and
retailers have tried to hold their prices but, in any supply chain, there
will always be someone at the bottom of the heap getting crushed. And some,
at the top, chasing profits no matter how they are achieved. Not all the
attempted solutions are as transparent as they could be; sometimes that
matters more than at other times. Based on some of the articles cited below,
and others, we discussed whether or not consumers care that pack sizes
are changing or getting smaller in order to avoid increasing prices. And
how much they care about country of origin, labeling, additives or anything
else so long as prices are low.
Private label manufacturers
(including national brand manufacturers looking to keep their production
lines working to capacity) and their retailers may end up being winners
now and for a long time to come. More retailers are offering their own
label products as an alternative to national brands. Discounters such as
Aldi and Lidl don’t even carry brands other than their own.
The offer, therefore,
has changed. Shoppers are spending their money differently – buying
different products from different stores. Discount, thrift and one price
for everything stores are seeing growth from groups who may never have
entered their portals before. Food – the one thing people cannot
stop buying – is available from a wider range of outlets. Which will survive
is one of the biggest questions for the industry today.
Discussion questions:
Do you believe most middle class consumers who are currently reducing
their spending are doing so in anticipation of the effects of recession
or are most really feeling the pinch already? How do you expect the consumer
price/value psychology to progress in 2009? How should manufacturers
and retailers respond?
- On store shelves, stealthy shrinking
of containers keeps prices from rising – Los Angeles Times - Shoppers ‘cheated’ as brands downsize – This
is Money - Value retailers to prosper in 2009 – study
– JustFood - Discounters continue to grab market
share – JustFood - Aldi and Lidl to aim for the middle
classes – The Independent
BrainTrust
Recent Discussions
Discussion Questions
Poll
At the individual level, either the consumer has been impacted by a business failure or a job loss, or they haven’t. For those that are, the deepest and most challenging aspects of the recession have been brought home.
However, for the vast majority of middle class consumers, the current spending is primarily in anticipation of tough times to come. The credit crisis, with higher interest rates and higher minimum payments is real, and has a material impact on spending. Again, it doesn’t affect everyone equally. The mortgage crisis, with adjustable rates having gone up, home values upside down, and the overall market in the tank, is real, and has a material impact on spending…although less now than anticipated.
The real factors which bring the recession home in “fact” instead of anticipation have to do with incremental changes in disposable income. Year-end bonuses and raises are expected to be less than any year in the past decade. Any wage earner who’s compensation is linked to growth will suffer diminished income. Many, many consumers are simply NOT going to be making more next year than they did this year. Consumers with families experience growth-related expense issues. For some middle class families, it really is more expensive to provide the same quality of life for their family…simply because their kids are older. Inflation appears to be under control now, although that too could change if the Obama administration prints money to pay for the social works programs proposed.
So, for the most part, it IS anticipation which is fueling the overall middle class mindset. However, the current Holiday spending reduction is much more related to the consumer credit crisis than to any other single element, and that is very real. Let’s distinguish between the overall middle class mind set and the specifics of the Holiday sales crash. They are different.
Because of the factors cited above, the recession IS real, even though it’s anticipation. As soon as the non-raise comes through, or the bonus goes away or the chance to earn a bonus next year evaporates…then the actual reduction in disposable income has arrived. We are just about there.
Every person in the country has been impacted already, and next year is going to be dreadful. With thousands of layoffs announced each day, 2009 promises to be challenging in the extreme. Frugality is now chic. Consumers who are paying attention will want to watch every expenditure they make, and this means not just a round of retail failures in February or March, but a likely second round later in the year.
With the number of job losses being announced (and those are only the recent ones), the increase of fuel prices that have had some relief recently, and the beginning of paying for fuel for heating, of course consumers are feeling the pinch.
Reducing the size of packages and keeping the same prices does not fool consumers, but it does drive consumers to consider private label products. Consumers will consider buying differently. Spending on more expensive items as small luxury purchases is likely to decline while consumers spend their money to get as much value as possible for the money they spend.
Those companies that are in the habit of capturing consumer information and consumer insight on a regular basis will be in a position to respond quickly to consumer changes. The expenditure of money to get that system set up was seen as a useful tool but not necessarily a critical tool about a year or two ago. Now, keeping in touch with consumer changes will be essential for success.
With the obvious exception of the many who have been affected by job cuts, I think most people who are cutting spending are doing so in anticipation of a tough 2009. Some may be expecting lower bonuses and some may be expecting lower salary increases. However, this perceived loss of income should not impede spending, rather, it would impact spending increases. Since the overwhelming message is that 2009 will be a very tough year, most people will in some way respond to the message. Fewer dinners out, not as many trips to Starbucks, etc. Clearly retailers are going to struggle to find the right message in this market.
I believe that middle class consumers are already feeling the recession. They began to feel the pain when the stock market crashed and their retirement accounts took a massive hit.
Their over-sense of wellbeing takes a hit each day that they are exposed to the news media. It sometimes seems that all the media can talk about is the recession. Is the media helping to deepen and prolong the recession?
Manufacturers and retailers should respond by offering value, with optimism and perhaps a sense of humor. This will impact consumers by giving them what they seek, while providing an alternative mindset to to the negative news stories that pummel them each day.
For better or worse, I believe many if not most consumers live and spend in their present state of being. However, in many households, at least one person has lost a job or else job hours have been reduced. We also need to keep in mind that although gasoline prices are currently way below the high prices of this past spring and summer, fact is, most middle class consumers got hit hard earlier this year, and still have less disposable income to spend.
When is the last time you heard or read good news about the domestic or global economy? The waterfall of gloomy and depressing news has sent consumers in to a protective mode. Consumers have accepted “fear” as their spending compass.
Manufacturers and retailers have already spoiled the broth by conditioning consumers’ minds that the prices of everything can be slashed in half or more to make it a “value.” That has destroyed the believability of “regular retail price.” Realizing this, and also accepting this, the marketing and retailing crowd must now interface with consumers with a new fair and honest communication paradigm to extract new dollars from old wallets.
Everyone that I talk to are very concerned about how bad and how long the economy will be hurt. Unemployment is getting worse and I think it will get much worse. The lack of retail spending will continue a downward spiral that will effect the entire economy. Our politicians have made this much worse than it would have been if they hadn’t been trying to scare us into more bailouts. They have succeeded in worrying people whose jobs and economic status were fairly safe.
Consumers are already in the negative mindset and are on continuous hunt for value. Middle class customers will look to stretch grocery dollars as much as they can. Retailers and vendors need to offer a better value proposition at this point in time. Margins are going to be awful as we try to move merchandise out the door.
Merchants that have strong vendor relationships should get together to plan out merchandising directions. When mapping out merchandising directions, we need to take that value thinking into account. Frugality and scrutiny are the dominate buying emotions right now. We need to react and execute based on those feelings.
The biggest factor negatively impacting consumer spending is anxiety. As the inquiry notes, words like bargain, sale, profit, etc, have a variety of meanings across the great swath of middle-income consumers–none more so than “value.” Similarly, middle incomers are being impacted by the down economy in a variety of ways that’s highly dependent on a variety of personal factors like credit card debt, car loans, mortgages and college tuition. But what’s gnawing at consumers universally is anxiety. And that means lack of spending confidence.
Merchants and manufacturers serving the middle class do have options. First, they need to communicate to consumers that they understand that the economy is causing shoppers to rethink their purchases. It’s recognition that this isn’t business as usual and that consumers aren’t in this alone. And then merchants need to communicate that “value” means more than “price,” e.g., the product’s healthy qualities or great customer service.
Going forward, expect the “new value mindset” to be with us throughout 2009. Middle-incomers have clearly indicated where they stand as far as the “value = price” equation. Now it’s up to merchants, marketers and manufacturers to redefine value in terms of “value = price + something else.” Success in 2009 hinges on what that “something else” is for consumers.
If there were a third choice, “Both of the Above” I think most of us would have voted there. It is impossible not to feel the effect even if your income went up a little. The perception of feeling a downturn is real. Even people who did pay off credit cards each month cut spending on them amid the worries. And everyone is aware that further effects of the downturn will be on the way and could effect them.
Marketers need to protect their hard-earned brand position at all costs, including the cost of not discounting and losing some sales. The cost of lowering prices and discounting is almost always greater as compared to lowered margins and profit. There are just plain fewer dollars to go around, and you’ll have a tough time taking them from anyone else. This is a time to protect the base and that means step up the communication in all forms.
Take the high road unless you are a discounter then this is your day. You won’t fare so well when people tire of the belt tightening and their bank account grows. This is also a good time for any innovation that reduces costs. Much of the cost that will be reduced should have been reduced anyway. I would say it all evens out in the end, but this time around the extra money may go to the government in some form or another to pay for the bailouts and deficit. I’d like to say our economy could grow its way out of it but I’m not sure it will work that way this time.
A very interesting set of commentary today, and what a great topic! Trying to unravel the perception of reality (or is that the reality of perception?) is the greatest challenge marketers of all stripes face.
For my part, I am ever the contrarian, I suppose. And while I may well follow Bill Miller right off the financial cliff, I continue to believe this is the investment opportunity of our lifetime. The biggest fear I have is that government will “fix things” to the point of no repair. We risk throwing all the rules that got us here out the window over fear-induced panic. (And by “here” I mean our status as the most prosperous nation in modern history–not the nanosecond of despair we are currently experiencing.) This stampede to “change” is exacerbated by every politician and CEO who wants to publicly trumpet impending disaster (or worse–whatever that is) in order to either get their pet bailout bill passed or to save their hides when 2009 proves ugly. We will be fine if we don’t die of self-inflicted wounds.
Most middle class people are already feeling some pain and are hunkering down for even more pain next year, and maybe even through 2010. It’s the unknown and the near daily newsworthy “surprises” that are scaring people to death. Unlike previous post WWII economic downturns it seems this time that absolutely everything everywhere in the economy is affected: credit, lending, union jobs, white collar jobs, service jobs, commodities, real estate, stocks, bonds, retail, construction, entertainment, exports, etc, etc.
My opinion is that all the screaming sale circulars and TV ads are not going to make most people spend right now except for food, necessities, and replacement appliances. Almost nobody “needs” another scarf or sweater or pair of shoes, let alone a chia pet or Billy Bass—and they know it. Furthermore, I agree with others here who worry that all the competing 50% 60% and 70% off markdowns are going to change retailer/consumer relationships and psychology permanently and not in a good way).
Back in the day when I was in management for a large and well-known Chicago retailer, we regularly advertised what we called “special purchases.” The idea was the store had received a special one-time deal on an item from a jobber or manufacturer and we were passing it on also as a special deal to our customers. There was no attempt to quantify the savings, but our customers knew and trusted there was genuine value there because they trusted the store. Assuming some retailers retain their dignity and connection with customers when this is all over, the “special purchase” promotion may be ripe for a comeback, so long as it is genuine and not overdone.
I think it is probably a 50/50 split between those who are pinching in anticipation, and those who are pinching from necessity. Most people don’t realize just how much their attitudes are affected by all of the negative media on the subject. When you are constantly bombarded with stories on how bad the world’s economy is and how much money we are sending elsewhere, it is hard to not get worried.
Fear plays a LARGE part in most people’s spending nowadays (where I live anyways) and I think the best way to gain consumers trust is to try not to focus so much on the negatives. I agree with one of the other posts that say to try and use humor or some other positive tactics. People appreciate the fact that everyone is feeling the pinch and want to go somewhere that truly appreciates them. Get back to great customer service, keep prices down (MSRP is a joke to many now), and BRING BACK LAYAWAY!!! THAT will get people to come in again.
I think consumers are like any other business; when the economic environment turns negative, and the news becomes pretty negative in turn, I think most families take a very cautious, prudent approach to conserve as much cash as possible. While businesses do this consciously, perhaps consumers do it more instinctively, but their objectives are the same.
Most mall retailers are slashing prices for Christmas. They’re not managing for profit, they’re managing for cash. But they’re teaching their customers to expect radical price slashing in the future. Which is worse? Cutting your gross margin and moving the goods (at possible great cost to your brand equity) or keeping your prices (Abercrombie & Fitch) and suffering steep comp sales declines? Either way, it’s profitless.
A good number of people have been hurt financially. Their assets have been substantially reduced. But this is money for the future. If one has saved for 20 years of retirement and just lost 10 of them, there’s still 10 years of saved assets ready to spend. That’s a lot of money if it’s going to be spent all in one year–on one retailer as many retailers would dream.
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At the individual level, either the consumer has been impacted by a business failure or a job loss, or they haven’t. For those that are, the deepest and most challenging aspects of the recession have been brought home.
However, for the vast majority of middle class consumers, the current spending is primarily in anticipation of tough times to come. The credit crisis, with higher interest rates and higher minimum payments is real, and has a material impact on spending. Again, it doesn’t affect everyone equally. The mortgage crisis, with adjustable rates having gone up, home values upside down, and the overall market in the tank, is real, and has a material impact on spending…although less now than anticipated.
The real factors which bring the recession home in “fact” instead of anticipation have to do with incremental changes in disposable income. Year-end bonuses and raises are expected to be less than any year in the past decade. Any wage earner who’s compensation is linked to growth will suffer diminished income. Many, many consumers are simply NOT going to be making more next year than they did this year. Consumers with families experience growth-related expense issues. For some middle class families, it really is more expensive to provide the same quality of life for their family…simply because their kids are older. Inflation appears to be under control now, although that too could change if the Obama administration prints money to pay for the social works programs proposed.
So, for the most part, it IS anticipation which is fueling the overall middle class mindset. However, the current Holiday spending reduction is much more related to the consumer credit crisis than to any other single element, and that is very real. Let’s distinguish between the overall middle class mind set and the specifics of the Holiday sales crash. They are different.
Because of the factors cited above, the recession IS real, even though it’s anticipation. As soon as the non-raise comes through, or the bonus goes away or the chance to earn a bonus next year evaporates…then the actual reduction in disposable income has arrived. We are just about there.
Every person in the country has been impacted already, and next year is going to be dreadful. With thousands of layoffs announced each day, 2009 promises to be challenging in the extreme. Frugality is now chic. Consumers who are paying attention will want to watch every expenditure they make, and this means not just a round of retail failures in February or March, but a likely second round later in the year.
With the number of job losses being announced (and those are only the recent ones), the increase of fuel prices that have had some relief recently, and the beginning of paying for fuel for heating, of course consumers are feeling the pinch.
Reducing the size of packages and keeping the same prices does not fool consumers, but it does drive consumers to consider private label products. Consumers will consider buying differently. Spending on more expensive items as small luxury purchases is likely to decline while consumers spend their money to get as much value as possible for the money they spend.
Those companies that are in the habit of capturing consumer information and consumer insight on a regular basis will be in a position to respond quickly to consumer changes. The expenditure of money to get that system set up was seen as a useful tool but not necessarily a critical tool about a year or two ago. Now, keeping in touch with consumer changes will be essential for success.
With the obvious exception of the many who have been affected by job cuts, I think most people who are cutting spending are doing so in anticipation of a tough 2009. Some may be expecting lower bonuses and some may be expecting lower salary increases. However, this perceived loss of income should not impede spending, rather, it would impact spending increases. Since the overwhelming message is that 2009 will be a very tough year, most people will in some way respond to the message. Fewer dinners out, not as many trips to Starbucks, etc. Clearly retailers are going to struggle to find the right message in this market.
I believe that middle class consumers are already feeling the recession. They began to feel the pain when the stock market crashed and their retirement accounts took a massive hit.
Their over-sense of wellbeing takes a hit each day that they are exposed to the news media. It sometimes seems that all the media can talk about is the recession. Is the media helping to deepen and prolong the recession?
Manufacturers and retailers should respond by offering value, with optimism and perhaps a sense of humor. This will impact consumers by giving them what they seek, while providing an alternative mindset to to the negative news stories that pummel them each day.
For better or worse, I believe many if not most consumers live and spend in their present state of being. However, in many households, at least one person has lost a job or else job hours have been reduced. We also need to keep in mind that although gasoline prices are currently way below the high prices of this past spring and summer, fact is, most middle class consumers got hit hard earlier this year, and still have less disposable income to spend.
When is the last time you heard or read good news about the domestic or global economy? The waterfall of gloomy and depressing news has sent consumers in to a protective mode. Consumers have accepted “fear” as their spending compass.
Manufacturers and retailers have already spoiled the broth by conditioning consumers’ minds that the prices of everything can be slashed in half or more to make it a “value.” That has destroyed the believability of “regular retail price.” Realizing this, and also accepting this, the marketing and retailing crowd must now interface with consumers with a new fair and honest communication paradigm to extract new dollars from old wallets.
Everyone that I talk to are very concerned about how bad and how long the economy will be hurt. Unemployment is getting worse and I think it will get much worse. The lack of retail spending will continue a downward spiral that will effect the entire economy. Our politicians have made this much worse than it would have been if they hadn’t been trying to scare us into more bailouts. They have succeeded in worrying people whose jobs and economic status were fairly safe.
Consumers are already in the negative mindset and are on continuous hunt for value. Middle class customers will look to stretch grocery dollars as much as they can. Retailers and vendors need to offer a better value proposition at this point in time. Margins are going to be awful as we try to move merchandise out the door.
Merchants that have strong vendor relationships should get together to plan out merchandising directions. When mapping out merchandising directions, we need to take that value thinking into account. Frugality and scrutiny are the dominate buying emotions right now. We need to react and execute based on those feelings.
The biggest factor negatively impacting consumer spending is anxiety. As the inquiry notes, words like bargain, sale, profit, etc, have a variety of meanings across the great swath of middle-income consumers–none more so than “value.” Similarly, middle incomers are being impacted by the down economy in a variety of ways that’s highly dependent on a variety of personal factors like credit card debt, car loans, mortgages and college tuition. But what’s gnawing at consumers universally is anxiety. And that means lack of spending confidence.
Merchants and manufacturers serving the middle class do have options. First, they need to communicate to consumers that they understand that the economy is causing shoppers to rethink their purchases. It’s recognition that this isn’t business as usual and that consumers aren’t in this alone. And then merchants need to communicate that “value” means more than “price,” e.g., the product’s healthy qualities or great customer service.
Going forward, expect the “new value mindset” to be with us throughout 2009. Middle-incomers have clearly indicated where they stand as far as the “value = price” equation. Now it’s up to merchants, marketers and manufacturers to redefine value in terms of “value = price + something else.” Success in 2009 hinges on what that “something else” is for consumers.
If there were a third choice, “Both of the Above” I think most of us would have voted there. It is impossible not to feel the effect even if your income went up a little. The perception of feeling a downturn is real. Even people who did pay off credit cards each month cut spending on them amid the worries. And everyone is aware that further effects of the downturn will be on the way and could effect them.
Marketers need to protect their hard-earned brand position at all costs, including the cost of not discounting and losing some sales. The cost of lowering prices and discounting is almost always greater as compared to lowered margins and profit. There are just plain fewer dollars to go around, and you’ll have a tough time taking them from anyone else. This is a time to protect the base and that means step up the communication in all forms.
Take the high road unless you are a discounter then this is your day. You won’t fare so well when people tire of the belt tightening and their bank account grows. This is also a good time for any innovation that reduces costs. Much of the cost that will be reduced should have been reduced anyway. I would say it all evens out in the end, but this time around the extra money may go to the government in some form or another to pay for the bailouts and deficit. I’d like to say our economy could grow its way out of it but I’m not sure it will work that way this time.
A very interesting set of commentary today, and what a great topic! Trying to unravel the perception of reality (or is that the reality of perception?) is the greatest challenge marketers of all stripes face.
For my part, I am ever the contrarian, I suppose. And while I may well follow Bill Miller right off the financial cliff, I continue to believe this is the investment opportunity of our lifetime. The biggest fear I have is that government will “fix things” to the point of no repair. We risk throwing all the rules that got us here out the window over fear-induced panic. (And by “here” I mean our status as the most prosperous nation in modern history–not the nanosecond of despair we are currently experiencing.) This stampede to “change” is exacerbated by every politician and CEO who wants to publicly trumpet impending disaster (or worse–whatever that is) in order to either get their pet bailout bill passed or to save their hides when 2009 proves ugly. We will be fine if we don’t die of self-inflicted wounds.
Most middle class people are already feeling some pain and are hunkering down for even more pain next year, and maybe even through 2010. It’s the unknown and the near daily newsworthy “surprises” that are scaring people to death. Unlike previous post WWII economic downturns it seems this time that absolutely everything everywhere in the economy is affected: credit, lending, union jobs, white collar jobs, service jobs, commodities, real estate, stocks, bonds, retail, construction, entertainment, exports, etc, etc.
My opinion is that all the screaming sale circulars and TV ads are not going to make most people spend right now except for food, necessities, and replacement appliances. Almost nobody “needs” another scarf or sweater or pair of shoes, let alone a chia pet or Billy Bass—and they know it. Furthermore, I agree with others here who worry that all the competing 50% 60% and 70% off markdowns are going to change retailer/consumer relationships and psychology permanently and not in a good way).
Back in the day when I was in management for a large and well-known Chicago retailer, we regularly advertised what we called “special purchases.” The idea was the store had received a special one-time deal on an item from a jobber or manufacturer and we were passing it on also as a special deal to our customers. There was no attempt to quantify the savings, but our customers knew and trusted there was genuine value there because they trusted the store. Assuming some retailers retain their dignity and connection with customers when this is all over, the “special purchase” promotion may be ripe for a comeback, so long as it is genuine and not overdone.
I think it is probably a 50/50 split between those who are pinching in anticipation, and those who are pinching from necessity. Most people don’t realize just how much their attitudes are affected by all of the negative media on the subject. When you are constantly bombarded with stories on how bad the world’s economy is and how much money we are sending elsewhere, it is hard to not get worried.
Fear plays a LARGE part in most people’s spending nowadays (where I live anyways) and I think the best way to gain consumers trust is to try not to focus so much on the negatives. I agree with one of the other posts that say to try and use humor or some other positive tactics. People appreciate the fact that everyone is feeling the pinch and want to go somewhere that truly appreciates them. Get back to great customer service, keep prices down (MSRP is a joke to many now), and BRING BACK LAYAWAY!!! THAT will get people to come in again.
I think consumers are like any other business; when the economic environment turns negative, and the news becomes pretty negative in turn, I think most families take a very cautious, prudent approach to conserve as much cash as possible. While businesses do this consciously, perhaps consumers do it more instinctively, but their objectives are the same.
Most mall retailers are slashing prices for Christmas. They’re not managing for profit, they’re managing for cash. But they’re teaching their customers to expect radical price slashing in the future. Which is worse? Cutting your gross margin and moving the goods (at possible great cost to your brand equity) or keeping your prices (Abercrombie & Fitch) and suffering steep comp sales declines? Either way, it’s profitless.
A good number of people have been hurt financially. Their assets have been substantially reduced. But this is money for the future. If one has saved for 20 years of retirement and just lost 10 of them, there’s still 10 years of saved assets ready to spend. That’s a lot of money if it’s going to be spent all in one year–on one retailer as many retailers would dream.