Beginning in the first quarter of this year, when unemployment was still slightly under 5% in the U.S., the housing foreclosure crisis was just starting to become serious (at least publicly), food inflation was only beginning to emerge, the price of gasoline hadn't come close to hitting $4-plus a gallon (its back down but will go back up again), and the political pundits thought now U.S. President-elect Barack Obama's change mantra was at best interesting, Natural~Specialty Foods Memo started writing in the Blog we were beginning to see signs of a "new frugality" or a beginning of a pronounced thriftiness among U.S. consumers.
We suggested the first signs of consumers trading down -- including at the food and grocery store -- were beginning to emerge; signs that we said would lead to even more shopper frugality as the year went on and the economy worsened, which it certainly has.
Many analysts were saying it was a 50-50 chance the U.S. would enter a recession in 2008. We were already using the terms "pre-recession" and "recessionary U.S. economy" in the first quarter of 2008 in Natural~Specialty Foods Memo.
The signs we sited as observing this rapidly emerging "new frugality" among American consumers, including at the food store, were an increase in the use of manufacturer's "cents-off" coupons, the beginnings of what looked to be a significant percentage shift from national brands to store brands or private label grocery products, a trading down among shoppers from upscale supermarkets and stores such as Whole Foods Market to more value-oriented grocers (including natural foods retailers like Sunflower Farmers Market and specialty grocers like Trader Joe's in the natural and specialty retailing sectors), along with a movement among consumers away from eating away from home at restaurants (medium-range and higher-end sit down restaurants) and to cooking more at home.
Then came the financial markets meltdown in September, also a time when the price of gasoline averaged over $4 a gallon in the U.S., more housing foreclosures were happening, when increased unemployment was starting to look like it was the beginning of a trend rather than an statistical blip, and food inflation, which has been soaring since the first of the year, continued to do so. These equal a perfect storm of negative economic indicators.
It was then that the mainstream media started sounding more like Natural~Specialty Foods Memo. Stories started appearing about a new thrifty ethic taking root among consumers -- perhaps only because they had no choice because housing values were down by double digits, gasoline still high, job security non-existent and the price of everything from food to home energy costs was soaring.
We don't mention our track record to pat ourselves on the back, nor to suggest we had a crystal ball. Rather we do so because we observe and analyze such trends closely, as do many others who were saying similar things in the first quarter. Among those others was Safeway Stores, Inc. CEO Steve Burd, who told us back in the first quarter he hadn't seen food inflation soaring as fast as it was in the 15 years he's been CEO of the supermarket chain. He was spot on.
Now, at the near-end of November, 2008, just a week before the Thanksgiving holiday, we're observing an even stronger and more widespread "new frugality" among American consumers, including their grocery shopping behavior, that we haven't witnessed since the 1970's in the U.S. It's survival being turned into "cheap chic" perhaps.
Coupon use has soared, shoppers, even upper income consumers, are flocking to Wal-Mart and other discount stores; people are making coffee at home instead of going to Starbucks, store brand sales growth is soaring by double digits; consumers are reporting they make fewer trips to the grocery store just so they can avoid the impulse to purchase more then what they need; and loyalist shoppers, who previously professed love for and spent lots of money at retailers like Whole Foods and were dedicated buyers of organic and premium foods, are finding even they, despite still having jobs with good incomes, also must trade down.
After all, even if you make over $100,000 a year, when your house has dropped in value by 40% and your 401-k retirement account by more than half, you too feel the need for a little frugality. Add to this job insecurity even among highly paid professionals, and it certainly can be called a "new frugality," and not just among the lower income and middle classes in the U.S.
The Associated Press has recognized the "new consumer frugality" trend we first started writing about in the first quarter of this year. Late last week the AP published a comprehensive trend-oriented piece by staff writer Dan Sewell, "The New Frugality: Americans return to thriftiness," that looks at this emerging "new frugality" among American consumers.
Below are the first four paragraphs of the AP story, which features observations and analysis we agree with:
'Frugality is making a comeback.
Fearful that economic conditions could get worse and stay that way, Americans are showing an enthusiasm for thriftiness not seen in decades.
This behavioral shift isn't simply about spending less. The New Frugality emphasizes stretching every dollar. It means bypassing the fashion mall for the discount chain store, buying secondhand clothes and furniture, or trading down to store brands.
There's more business for repairmen and less for salesmen. Consumers are clipping more coupons and swiping their credit cards less.'
The AP story also discusses further how American consumers are applying this new thriftiness to grocery shopping, including mentioning some of the indicators such as increased store brand sales and coupon use we've been discussing in Natural~Specialty Foods Memo since early this year.
A serious of recent stories in Forbes.com also demonstrates this "new frugality" among American consumers, as do the sales and profit numbers of the companies reported on in those pieces by Forbes.
In fact, just the headlines alone of the Forbes' stories offers a good overview of the seriously bad state of the U.S. economy and the "new frugality" shoppers are employing in order to survive what looks to be a long recession. We think it will last all of next year, and is going to get much worse -- more foreclosures, increased unemployment, more corporate failures -- before it begins getting better.
There are two positive signs currently for consumers however -- the fact the price of gasoline has dropped by 50% in just the last month, averaging about $2 a gallon at present nationally in the U.S., along with the fact food inflation should slow down considerably beginning in 2009 because the commodity prices of corn, wheat and soy beans are coming down, which should is already leading to lower prices on the shelf.
Additionally, the new consumer frugality is resulting in less of a demand for many food items. This is helping to lower the retail prices of dairy products and other food consumers have cut back on purchasing because of the double-digit price increases since January of this year.
The potentially negative macro-economic aspect to this price deflation however is that if prices drop too much across the board the U.S. economy could enter into a period of deflation rather than inflation, neither of which is good. Depressed retail prices, and thus margins for companies, also could mean more business failures, including in sectors beyond banking, durable goods retailing and the auto industry.
Next up for bailouts we predict will be certain insurance companies; especially those that insure financial instruments like AIG does. The giant insurance firm AIG has already received over $100 billion of the $700 billion U.S. government, taxpayer-funded financial services industry bailout money allocated last month by the U.S. Congress and the Bush Administration.
We also expect to see more durable goods retailers file for bankruptcy And of course if one or more of the big three Detroit auto companies goes bankrupt there will be a cascading financial crisis among suppliers and related businesses that could put millions out of work in a scant couple months.
There's a silver lining in this new consumer thriftiness for grocers though -- since consumers are eating out less that means they are cooking and eating at home much more often, which is why publicly-traded supermarket chains, with a few exceptions such as upscale Whole Foods and a couple others, are holding their own. Discounters that sell lots of food and grocery products, like Wal-Mart with its Supercenters and BJ's Wholesale Club with its food-centric membership club stores, are even thriving in the recession compared to others. Further, supermarket chains like Safeway Stores, Inc. who defined and promoted their value propositions early this year also are doing well.
In the foodservice sector, McDonalds is benefiting strongly from the "new American consumer frugality," while Starbucks is struggling mightily: Consumers are trading down to $1 cups of coffee and items off the dollar food menu at McDonalds, from the fancy $5 coffee drinks and $8 panini sandwiches they used to buy at Starbucks.
Below are a series of recent stories from Forbes.com that tell the story about the current winners and losers in this new frugal consumer world. Just click on the title link to read the story:
[Grocers Cash In As Americans Eat Cheap....Wal-Mart's 3Q profit rises 10 percent....BJ's Wholesale profit jumps 24 percent....BJ's To Consumers: Bring It On....Whole Foods 4Q profit plunges on Wild Oats costs....Burgers Thrive In The McDownturn....Coffee Yes, Starbucks No.]
For upscale and natural foods retailers, along with supplier companies in the natural, organic, premium and specialty foods spaces, this new consumer thriftiness means getting tough -- keeping costs down and offering value even on natural, organic and specialty food and grocery items.
At present the majority of U.S. consumers aren't going to pay a premium in terms of the cost of products in these categories just to shop in a fancy supermarket or to buy a prestige brand. There still are plenty (less though) of shoppers buying natural, organic and specialty food and grocery products but they want value -- and will seek out those brands that offer it as well as shop in those stores that offer lower prices on natural and organic produce, meats and grocery items. It's all about the value proposition right now -- even on products that normally sell for higher prices than conventional food and grocery items do.
Upscale supermarket chains like Wegmans on the east coast and Raley's in California have got this message, as has Safeway Stores, Inc. with its Lifestyle supermarkets located across the country. All three of these chains for example have been and are increasing their value propositions (lower prices and creating value-based promotions), including in the areas of organic, specialty and premium prepared foods, as well as in the basic food and grocery categories, which is where they are putting most of the emphasis overall.
Whole Foods Market, Inc. has been working hard to up its value proposition since earlier this year when it saw its quarterly profits tumble by 40%. For example, its-recently reported drop in quarterly profits, as reported in the Forbes story linked above, was less than that 40% reported in the previous quarter.
Discount-oriented natural, organic and specialty retailers like Trader Joe's, Sprouts Farmers Market and Sunflower Farmers market are doing better. In fact since earlier this year they have been taking share away from Whole Foods stores in the U.S. markets where they compete. This is another reason Whole Foods has and is focusing on creating and communicating a value proposition, including for the first time in its history offering deep discount coupons periodically, which are good for $5 off total purchases of $25 or more at its stores.
We see this new consumer thriftiness continuing for some time, since we see the severe recession first getting worse than it is at present, then continuing for sometime. Additionally, if the current recession continues throughout 2009, which as we said we think it will, then starts improving say in late 2009 or early 2010, that will have given U.S. shoppers a long period of time to practice this "new frugality." As such it's possible there could be some longer term behavioral changes -- a long term new thriftiness -- among middle and even upper income American consumers long after the current recession ends. Such behavioral shifts aren't uncommon.
The good news however for the retail grocery industry, as well as for most sectors on the supple side compared to other consumer products makers, is that the food and grocery sectors are in the main benefiting from the eat-at-home trend that's part of the "new American frugality" among consumers.
However, as we said above, it will be those retailers and manufacturers-marketers who focus on the value proposition regardless of what sector of the industry they are in, including natural-specialty foods, that will survive the downturn, living again for a better day, which also might include a return to more indulgent food spending because of a pent-up desire among shoppers to splurge on natural, organic, premium and specialty foods once this current severe economic recession ends.
Meanwhile, it looks like the motto of the average American consumer right now is: "Life, Liberty and the Pursuit of Frugality."
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