Retail Memo - UK: Sainsbury's CEO and Tesco Marketing Chief Offer Differing Analysis of Food Retailing and Shopper Behavior at Retail Week Conference

News & Analysis

The British trade publication Retail Week is holding its annual retailing conference this week in the United Kingdom.

Today, executives from two of the UK's top supermarket chains, number one Tesco and number three Sainsbury's, addressed the UK retaling conference focusing on what each chain views as the state of food and grocery retailing and food shopper behavior in the nation at present in these recessionary times.

Representing Sainsbury's and speaking at the conference was its CEO, Justin King. And representing Tesco was Carolyn Bradley, the supermarket chain's director of marketing for the UK.

Interestingly, Sainsbury's CEO King and Tesco's Ms. Bradley painted an almost complete opposite picture of how their respective chain's are currently viewing consumers and food retailing in the UK, which like the U.S. and most elsewhere in the world is in the midst of a severe recession.

For example, Tesco UK marketing chief Bradley said the nation's leading supermarket chain believes consumers are trading down. Therefore Tesco has and continues to adjust its merchandising, marketing and promotions in a more discount price, value-based direction, she said in her speech.

According to a story in Retail Week today, she said UK consumers' trading down behavior is "manifesting itself through them changing lots of little things: consumers doing without a latte, finding cheaper ways to treat themselves and trading off larger purchases such as sofa or a holiday."

But in contrast, in his speech, Sainsbury's CEO Justin King said he doesn't see a significant consumer trade-down in the UK. Rather, he argued in his speech that the middle, where Sainsbury's is positioned in the market, continues to hold.

Below (in italics) is a summary of what CEO King said in his talk, from a report in Retail Week today:

"King said assertions that consumers are downtrading, that people revert to selfish behaviour and that the middle ground erodes in a recession is not what the supermarket is experiencing.

Sainsbury's is seeing that its customers are largely sticking with the company, but changing what they buy, cooking more and transferring spend from eating out to buying things like family ready-meals, King said.

Despite the warnings of many, Sainsbury's is not feeling the middle ground being squeezed, he added.

He said: "Being in the centre is a good place and you are uniquely positioned to work with customers as they make changes."

He added that the £10 million Sainsbury's has banked for Comic Relief so far this year proved that consumers were not becoming less altruistic.

King said that while his customers genuinely fear for their jobs, those that still have jobs also have household budgets that are under less pressure than they have been for a very long time.

Sainsbury's has conducted research into how different sectors within retail have been affected by previous downturns, and food has traditionally been the most resilient.

He also demonstrated the consistent messaging - "having the "same DNA", as he described it - in Sainsbury's adverts over the years, and over previous downturns.

He said that Sainsbury's focus on cooking and ingredients in its adverts is as relevant today as ever, with more people rediscovering cooking as a way to mitigate the food inflation that has been experienced.

King is keen to provide leadership to his staff and customers with a "glass half-full attitude".

He said that even if 1 million consumers lose their jobs this year, as economists predict, that will still leave 97 per cent of the workforce in employment, and Sainsbury's must continue to serve them.

At the same time, he believes that everything Sainsbury's is doing, with its focus on value, switching to own-label and more home cooking, will be even more relevant to those who are unfortunate enough to lose their jobs this year."

Now, read below (in italics) the Retail Week summary of Tesco's Ms. Bradley from her speech at the conference:

"Bradley said Tesco has been tracking consumers changing confidence, and where as price and fuel inflation were the main concerns last year, this has given way to job security as the biggest issue.

Unlike Sainsbury's chief executive Justin King, who spoke at the conference earlier in the day, Bradley said that she believed consumers are trading down.

She said that this is manifesting itself through them changing lots of little things: consumers doing without a latte, finding cheaper ways to treat themselves and trading off larger purchases such as sofa or a holiday.

Unlike King, Bradley also sees that consumers' concern for ethical matters giving way to price. She says that mums' main concerns right now are providing for their family, and not letting them suffer even when budgets have to be cut.

She defended Tesco's decision to launch its Discounter range, and said that it was done after Tesco had identified a substantial gap in the market between generic branded value products, and big brand merchandise.

She used the example of one customer who had been able to cut her weekly shopping bill in half by moving to the Discounter products.

She said price is where retailers need to start, and so Tesco has focused on reducing the cost of reducing everyday items, and giving customers more price choice for each item they buy.

Finally, she said that it was important to allow customers to retain a sense of fun and treats. Tesco has seen an increased take up of its Clubcard Deals, where customers can exchange Clubcard points for vouchers for days out and other leisure activities.

She said: "It is a way that they can still afford to go out to [places like] Café Rouge. These little luxuries offer huge value to customers."

She also pointed to deals on Finest meals, and entertainment promotions, as other ways the supermarket is allowing its customers to treat themselves."

Reading the summaries of the speeches given at the conference by the Sainsbury's CEO and Tesco's UK marketing chief, one could easily come to the conclusion they aren't talking about the same country or market, if we hadn't told you in advance that they are.

What makes the stark differences in Tesco and Sainsbury's analysis of the UK food and grocery retail marketplace all the more interesting is that historically both supermarket chains have a very similar customer base -- the middle. Neither are discounters like Wal-Mart-owned Asda. Nor are Tesco and Sainsbury's upscale supermarket chains like Waitrose or Marks & Spencer. They are historically mid-range operators.

For example, both competing supermarket chains offer an extensive selection of natural, organic, specialty and premium foods on store shelves alongside conventional manufacturers' and store brands. These natural, organic, specialty and premium products include the retailers' own brands, as well as premium prepared food items, organic produce and meats.

However, because of the recession, Tesco has made a strategic decision to go more discount; to put a much more aggressive focus on price than it has ever done. This decision is largely because the UK's leading supermarket chain (it has a nearly 31% sales market share) has been losing market share points (about 2.5 points in the last 18 months) to Asda and to the small-format, hard-discount German chains Aldi-UK and Lidl.

Sainsbury's on the other hand has resisted getting into the discount game full-force, although it to has been sharpening its pricing, promotions and value offerings, as CEO King said in his speech. But unlike Tesco, it hasn't strategically made a strong price- discount move.

This got us to thinking: Could it be that the main reason the viewpoints of the two executives representing Britain's leading supermarket chains are so differing is because each of the respective chain's has staked out a very different recession strategy and therefore used their speeches at the conference more to defend what each supermarket chain is doing strategically instead of actually attempting to diagnose what British grocery shoppers are really doing in terms of their behavior in these tough economic times?

We aren't making a value judgement on what either of the executives said in their speeches. Rather we're attempting to account for the major differences in how each of them says their supermarket chains view the current state of the British grocery shopper and UK food retailing.
Were Tesco and Sainsbury's radically different formats and food retailers, such an attempt at understanding these differences would be a moot point. But they aren't -- in fact the two chains have far more merchandising, positioning and and operational similarities than they do differences.

Lastly, the explanation could be simple. It's always difficult to attempt to describe consumer behavior in any global way. Perhaps what's happened is Sainsbury's has retained more mid-range shoppers than Tesco has. Therefore, Sainsbury's has yet to see a loss in sales of the same volume as Tesco has because of this possible scenario. So, based on this observation, CEO Justin King's "the center continues to hold" position makes more sense.

And if this scenario is true, that in the case of Tesco it has lost more customers to the discounters like Asda and Aldi, as the market share data tends to suggest, and it needs to win back these shoppers, then it makes sense the retailer tends to see the trading down consumer behavior much more so than Sainsbury's does.

From a macro perspective though, all data in the UK suggests shoppers are trading down when it comes to food and grocery shopping. The Tesco scenario. This is why Aldi and Lidl are the biggest percentage gainers in market share. There's also an abundance of other evidence that the trading down behavior has been going on in the UK for at least a year -- and increasing as the economy worsens.

If Sainsbury's isn't seeing it, that's good news for the chain and its shareholders. But if instead of not seeing it, Sainsbury's is missing it, then that will be bad news for the chain and its shareholders.

But fortunately we have a scorecard to track it. Sainsbury's will soon release its financial results. And new UK market share numbers will also be released soon.

By the same token, is what Tesco seeing, and doing about it, a clear picture of UK shopper behavior? Since Tesco is set to release it financials soon as well, along with the upcoming market share numbers coming out as mentioned above, we will be able to make some analysis of Tesco's approach, as voiced by UK marketing chief Bradley in her talk at the Retail Week conference, soon.

Marketing Memo - USA: Meet the New 'Middle-Age Simplifiers,' For These Affluent Consumers Less Will Be More Says Harvard Business School Professor

The New Consumer Minimalism

Natural~Specialty Foods Memo has been arguing for many months that upscale food and grocery retailers -- including supermarkets, specialty retailers and premium-oriented natural foods reatilers like Whole Foods Market and others -- must focus on creating, implementing and aggressively communicating value-based retailing propositions during the current, severe economic recession, which we believe will last all of next year, and is going to get worse before it gets better between now and the end of 2009, if it ends then.

We've also offered this same analysis to premium specialty and natural/organic products brand suppliers and marketers in the natural-specialty foods space. Even if they sell specialty and organic brands geared to higher income consumers, value is King in these times, we've argued -- and still do.

By value we certainly mean price -- as low as is possible. But we mean more than that. By a "value proposition" we mean the creation of a marketing strategy (a set of things) that offers consumers a reason to purchase higher priced specialty and organic food and grocery items because doing so, at a decent price, offers value in the ways of good quality (such as nutrition, safety, ect.) combined with an afforable price, along with providing other "value" benefits.

For retailers in the segment it means cutting margins a bit to create a better everyday price profile in their stores. It also means buying smarter; including negotiating more and deeper deals and reflecting that savings at retail to consumers. It also means more solution selling, along with a focus more on specialty-oriented and organic product basics (oils, grains and condiments rather than packaged organic ready-meals, for example) rather than fancy niche items. It even matters how the stores are designed -- too fancy is a turn off; minimal could be in.

Most recently we've been arguing that if the current recession lasts as long and becomes as deep as we think it will, it's likley we could see some long-term changes in consumer behavior in the food and grocery product categories in the natural/organic and specialty segments. These changes could take the form of simplification -- consumers buying considerably fewer higher margin, value-added processed and prepared foods items for example in favor of more ingredient-oriented ones. Back to basics.

We are already seeing this as consumers cook more at home and not only buy more basic items, seeking the best available prices on them, but also are buying less in terms of total weekly grocery purchases. Less is more -- out of economic neccessity. They also are using coupons in record numbers, cheery-picking store weekly ads for bargains and buying items much more often in bulk form.

Harvard Business School marketing professor John Quench argues we're already seeing long- term changes in consumers, particularly in a consumer segment he calls the "middle-aged simplifiers." (His focus is in the United States.) These "new consumers" are the ones who most frequently shop at Whole Foods Market and other upscale chains. They are folks with plenty of money and plenty of education -- the folks who've been driving the U.S. consumer economy for many years.

Professor Quench argues that's over. He says the new, "middle-aged simplifier" "finds herself surrounded by too much stuff acquired. She is increasingly skeptical in the face of a financial meltdown that it was all worth the effort. Out will go luxury purchases, conspicuous consumption, and a trophy culture. Tomorrow's consumer will buy more ephemeral, less cluttering stuff: fleeting, but expensive, experiences, not heavy goods for the home," he says.

While these new consumers still have to eat -- and shop for and buy food and groceries (although it can be done online as well as in person, and that might become a "simple solution") -- its likely, if the professor is correct, they will adapt their new, simplified consumer lifestyle to food and grocery shopping as well as all else.

Lavish food emporiums like Whole Foods' mega-premium organic markets and H-E-B's uber-gourmet Central Market (and those of many other retailers) stores could be out, in favor of no frills, small-format minimalist markets like Sav-A-Lot or Aldi perhaps, as well as the more minimalist natural foods stores like those operated by fast-growing Sunflower Farmers Market and Sprouts Farmers Market, for example. Or, perhaps, the Whole Foods' of the U.S. will adapt and create that value proposition, if the professor is right about the extent of this new, "middle-age simplifier" consumer cohort.

Professor Quench argues his point in a recent essay, "How Recession Will Accelerate Consumer Downsizing," first published in his "Marketing KnowHow" Blog. The thrust of his focus and examples are mostly on premium and luxury consumer durable goods. However, make no mistake about it, if his prognostications are correct, this new, emerging consumer segment could have a profound change on the food and grocery segments in the areas of marketing and retailing.

And like all new consumer trends, this one too offers opportunity to the natural and specialty foods industry.

For example, quality-oriented natural and specialty food and grocery products with minimalistic features could be big with such consumers under the professor's scenario.

In addition, minimal yet attractive specialty supermarkets and natural foods stores that emphasis quality but not conspicuous consumption could be the ticket? (Time to read Thorstein Veblen if you haven't before or re-read him if it's been a while)

The key as always is to capitalize on a new consumer segment and trend in an honest and real way by offering true value and something consumers want to buy and consume regularly -- and in the case of food stores, shop in regularly. Adapt to thrive is always a good mantra. Natural~Specialty Foods Memo believes a new era of consumer minimalism is being ushered in by the current recession.

Below is professor Quench's essay:

How Recession Will Accelerate Consumer Downsizing
By John Quench
Professor of Marketing, Harvard Business School

Watch out for a new brand of consumer in 2008: the middle-aged Simplifier. She finds herself surrounded by too much stuff acquired. She is increasingly skeptical in the face of a financial meltdown that it was all worth the effort. Out will go luxury purchases, conspicuous consumption, and a trophy culture. Tomorrow's consumer will buy more ephemeral, less cluttering stuff: fleeting, but expensive, experiences, not heavy goods for the home.

The economic boom of the 1990s fuelled consumption and democratized access to a wider than ever spectrum of goods transforming former luxuries into "must-have" necessities. Millions played the lotteries or aspired to what they viewed on "Lifestyles of the Rich and Famous". As they grew richer, pressure increased on those below to trade up. And, as they traded up, pressure increased in turn on the well-off to buy even more--the second home, the big screen TV and the latest sport-utility vehicle. Enter the big houses that measured success in thousands of square feet of floor space, topped by the 40,000 square feet, $50m palace that Bill Gates has built outside Seattle. In 2006, 35% of new homes exceeded 2,400 square feet in floor space compared with 18% in 1986. Ironically, these mansions, many owned by business people on the road half the time, grew in number as the size of the average American household declined.

These huge houses had to be filled with more stuff, good news for the home-appliance and home-furnishing industries. Even grocery manufacturers benefited. Larger homes with bigger refrigerators can absorb more inventory. Flat birth rates in developed economies have put pressure on durable consumer-goods companies desperate for top-line growth. Product quality improvements mean these goods break down less often. So durable-goods sales depend on two things: the launch of new, higher-priced, higher-featured, often customized products that persuade consumers to trade in their existing appliances before they break down (think cell phones), as well as household penetration of products such as fax machines and printers previously used only by businesses.

As the world economy slumps, one consumer segment will grow faster than ever. The Simplifiers have four characteristics.

First, they perceive that they have more stuff than they need. Sure, they may collect something specific like porcelain figurines as a hobby, but they are the opposite of the pack rats who fill their attics and basements with "you-never-know-when-you-might-need-it" stuff.

Second, they want to collect experiences, not possessions. And they give experiences rather than goods as gifts to friends and relatives. Experiences may seem ephemeral. They cannot be inventoried except in the form of "Kodak" moments; but they do not tie you down, require no maintenance, and permit variety-seeking instincts to be quickly satisfied. Dining out, foreign travel, learning a new sport will prove more resilient than expected in the face of recession.

Third, their stuff embarrasses them. Their Range Rovers no longer tell the world that they are sophisticated town and country socialites. There are simply too many of them on the road to offer much social status. Worse, they now signal the irresponsible selection of a gas-guzzler.

Fourth, they have wealth that is so assured that it no longer requires conspicuous display. They lease their cars, rent other people's holiday homes, and would happily outsource other aspects of their lifestyles. They reject the marketer's continual pressure to spend more money on possessions rather than on education, health care, and other social goods.

These are the consumers who are now trading in their sport-utility vehicles. They include the empty-nester baby-boomers, less confident than before, who are tired of heating unused spaces in cavernous mansions, now preferring smaller houses with architectural character and intimate spaces, more charm and less maintenance. Their families are scattered, unable to share conveniently the family holiday home and often unwilling to inherit the burden of something they will never use. The new economy has made it even easier for consumers to get rid of their stuff. The high-tech equivalents of the yard sale, electronic auction sites, bring Simplifiers together with those who are yet to catch the habit.

This growing segment of Simplifiers presents a challenge to marketers. These are well-off people who value quality over quantity and do not buy proportionately more goods as their net worth increases. Their increasing reluctance to consume will dampen expected demand growth in developed economies further and therefore slow economic recovery, requiring consumer-goods multinationals to further focus their efforts on emerging markets where stuff will still be king.

Consumer Behavior Memo: 'Uber-Cocooning' -- Many American Consumers Staying 'Home For the Holidays' Out of Forced Economic Necessity

Yesterday we wrote and published this piece, "Consumer Behavior Memo USA: 'Life, Liberty and the Pursuit of Frugality' - America's New Consumer Frugality," about a trend we are calling the "new, frugal American consumer."

Jennifer Waters, a staff writer for the Marketwatch.com news and business Web site has a well researched and written article today, "Be it ever so humble: Cash-strapped consumers embrace 'home for the holidays,'" which we think serves as a good companion piece to our frugal consumers story linked above from yesterday.

Ironically, the old saying, "There's no place like home for the holidays," has always evoked warm thoughts and feelings among Americans because it reminds them of being home for the holidays as a child -- hearth and home and other such feelings of comfort. And many Americans do stay home for the holidays even though they don't have to. Having that choice makes doing so evoke even warmer thoughts and feelings, after all.

But this year, cash-strapped, house-poor, near 401-K retirement account-less U.S. consumers are in most cases staying home for the holidays not out of choice but because they need to from a financial standpoint. Home is not only where the hearth is this year, but it's where the money savings is.

In her story, Jennifer Waters uses a term we like to explain the stay-at-home 2008 holidays --"a forced rendition of cocooning." It appears the CIA isn't the only user of forced rendition these days -- so is the U.S. economy.

Cocooning of course is that popular term thought up a number of years ago by trend-forecaster Faith Popcorn to explain why at the time increasing numbers of consumers were staying home more rather than going out. The trend was towards more meals at home, renting videos and watching them at home rather than going to the movies, and other related at-home behaviors.

Ms. Popcorn is quoted in the article in Marketwatch.com, calling the 2008 version of staying at home "uber-cocooning," attributing it not to choice but to economic realities this holiday season.

Read the article, "Be it ever so humble: Cash-strapped consumers embrace 'home for the holidays,'" here.

"Uber-cocooning," or economically-forced home rendition, fits with our concept of the new, frugal American consumer. And while this new frugality poses challenges for food and grocery manufacturers and retailers, it, along with the fact consumers are spending more time at home -- and eating more at home than ever in recent times -- favors grocers as well as food manufacturers and marketers more so than any other consumer products and retailing industries. After all, even "Uber-cocooners" must eat.

In fact, sense many more consumers are spending the holidays (and the non-holidays) at home, this means fewer will be eating holiday meals out at restaurants. Instead more consumers will be cooking their holiday meals at home, meaning shopping at the supermarket, discount store or natural foods market for food and groceries this year. The upside to cocooning or hibernating of any kind is cocooners need provisions. The grocery store is where they must go to get them.

The challenge of course for food manufacturers and marketers, especially those in the natural, organic and specialty foods sectors, is to get these home for the holidays (and regular days and nights as well) consumers to buy their brands. With a huge surge in store brand purchases right now its advantage retailers. Of course many of these manufacturers produce the private label brands for the retailers so there's some saving grace there at least.

But overall, this year's home for the holidays trend should be good for the food and grocery industry as it will mean more shoppers, perhaps buying less, and since the Thanksgiving holiday for example is a four day holiday, cocooning consumers will need to stock up for those four days at home. The same should be the case for the rest of the year -- not just the holidays.

Retail Memo: What's Next For U.S. Retailers if the Economy Picks Up in 2010?

Retailing in trying economic times

The Kiplinger Business Resource Center, which has been forecasting business, economic and consumer behaviors and trends in the fields of agriculture, retailing, finance and other sectors for many decades in the U.S., and writing about these forecasts and trends in its popular Kiplinger Letter newsletters, is out today with a retail forecast for the U.S. for 2010. The premise of Kiplinger's forecast is what retailers in the U.S. can expect if and when (as optimists we say when) the economy picks up in 2010.

Among the trends Kiplinger suggests could stick after the current severe economic recession include consumers sticking to value and continuing to trade down to discount retailers like Wal-Mart Stores, Inc., a current phenomenon we wrote about earlier today in this piece: "Consumer Behavior Memo USA: 'Life, Liberty and the Pursuit of Frugality' - America's New Consumer Frugality."

Additionally, Kiplinger sees quality making a comeback -- but it must come with value. Again this is something we've been saying in regards to upscale, specialty and natural foods stores in terms of the need to offer a value proposition even on organic, higher-end and premium food and grocery products. For example, Whole Foods Market, Inc. has learned that lesson and is trying to do just that -- create and communicate a value proposition for its stores.

The Kiplinger 2010 forecast also suggests consumers will do much less frivolous buying than they did before the current recession (American consumers have been buying frivolously from about the mid-1980's to 2007 in fact, with the exception of a couple years during the recession of the early 1990's), even if the U.S. economy comes roaring back strong in 2010.

This consumer behavior change (less frivolous buying, trading down, searching for value) which is happening right now is something we've suggested could last after the recession is over. We see a deep recession all through 2009. Consumers will trade down even more because they have to all of next year, we believe, and once the economy improves (hopefully by 2010) will have developed some learned behavior in this regard, which we think will prevent them from going right back to the old shopping patterns.

However, we also think there is going to be some pent-up buying desire among consumers once the recession is over. We think that will be good for upscale-oriented food retailers because it's our analysis the first things consumers will start buying again in significant volume are affordable luxuries like organic, specialty and premium food products. They won't be able to buy a new car perhaps, and certainly not a new house, but can afford to spend a little extra at the grocery store, and receive the gratification doing so brings, once the recession ends and things look more optimistic.

Additionally, as we've suggested previously, if the recession lasts all of next year, which we believe it will, consumers will have had nearly two years worth of trading-down and penny-pinching retail shopping behavior. They likely are going to expect value even when the economy improves. After all, the loss in home values and retirement savings, for example, will still be there in 2010. Much of the meager wealth, which was mostly in housing equity, of the middle and upper-middle classes in the U.S. has been wiped out already.

Other 2010 forecasts from Kiplinger include a continuation of retailers building smaller stores -- what we call the "small-format food and grocery retailing revolution" in the U.S -- a beefing up of customer service by retailers of all formats, and retailers developing a whole new set of coping strategies in order to deal with the challenges ahead.

On the small-format store front, Kiplinger agrees with Natural~Specialty Foods Memo that retailers like Wal-Mart who build and operate huge stores won't stop doing so. Rather, as we often write, they will continue what's already been started, which is building smaller-format, sibling formats and stores to go with the mega-stores like Supercenters and Sam's Club formats. We think other chains will join the small-format sibling store club as well in 2009-2010, despite the recession.

Read the latest retailing forecast, written by Laura Kennedy, from Kiplinger: "What’s Next for Retailers? What can retailers expect when the economy finally picks up in 2010? here.

The Kiplinger forecast in our analysis is a good snapshot of some likely consumer and retailer behavioral trends come 2010, assuming the U.S. economy improves by then. If it doesn't improve though, all bets are off, as a recession still strong in 2010 is going to result in some serious changes not only in consumer and retailer behavior, but in the entire structure of the U.S. economy, we believe.

And the government, corporate and individual debt load by 2010, even if the economy comes roaring back by then, still is going to alter retailing as usual for some time, in our analysis.

Just look at what's happening across the board already in terms of consumer debt and lack of credit. Now unemployment and job insecurity has been added to those negatives. In just two months many middle class consumers have gone from cutting back to not knowing if they can even afford the basics in food and groceries each week or month.

For these reasons we believe all food and grocery retailers, regardless of format, must develop and communicate their own unique value proposition now. We strongly believe doing so is a matter of survival as things continue to first get worse then shake out in 2009 and beyond.

We even believe high-end specialty-gourmet food retailers like Dean & DeLuca, which tend to cater to upper middle-class and wealthy consumers, need their own unique value propositions. As an example, in the quarter just ended Wal-Mart Stores, Inc. reported the average income of the shoppers in its stores has increased considerably in the last six months. That's because higher income consumers are trading down to the retailer.

Retailers must remember the upper middle-class and even many of the wealthy are hit hard by dramatic losses in the value of their homes and retirement savings. Housing values are down by 25-50% in many parts of the U.S. And down by at least 10-15% even in the best regions. Retirement accounts are down for many people by as much as 40-50% because of the poor performance of the stock market.

As a result, the upper middle class and even many of the wealthy (or we should say the recently former wealthy) are in growing numbers looking for value, even at Dean & DeLuca and other upscale and specialty food and grocery retailers.

Consumer Behavior Memo USA: 'Life, Liberty and the Pursuit of Frugality' - America's New Consumer Frugality

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.'

Read the full Associated Press article here.

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."

Consumer Trends Memo: The 'Era of Cheap Food' May Be Over in the U.S.; But Good Cheap Eats Can Still Be Found...it's All About Value

New York magazine is just out with its annual "New York Best Cheap Eats" cover issue. The magazine scours the Big Apple every year for its "Best Cheap Eats" issue, which devotes dozens of pages to the restaurants and stores in New York City where consumers can find the best deals on foods ranging from the simple--a slice of pizza--to gourmet-quality meals across nearly every ethnic range.

The magazine's editors say this year's issue will likely be its most popular ever since the poor state of the U.S. economy, which includes soaring food inflation, is driving even many of New York's more affluent residents--not to mention the scores of business travelers, and tourists who flock to the Big Apple this time of year--to search out cheaper alternatives for their meals and food purchases.

The current economy is doing the same to most lower, middle and even many upper-income consumers in every big city, suburb and small town in America.

This year's edition covers what seems like every square inch if New York City's food landscape in terms of the editorial teams search for the cheapest eats in America's largest city.

Among the food categories the special New York magazine "Cheap Eats" issue features include:

The Cheap List
The best cheap eats of 2008.

Chef’s Choice
Top cooks’ favorite cheap eats.

Cheap Eats Consumer Price Index
How the rising cost of food trickles down to pizza and hamburgers.

The Cheapest Of the Cheap
The ten best new things to eat in New York for $5 or under.

Beggars Can Be Choosers
What can you get for a measly dollar these days?

The High-Low $20 Showdown
We asked two very different chefs to create a three-course meal for two using the same $20 budget.

New York magazine also asked two chefs to design a three-course meal, giving them just $20 to complete the task. You can read that story at the link directly above ("The High-Low $20 Showdown). One chef created a more basic meal with the $20, while the other went more high-end and gourmet with the $20 budget.

The more basic (not so basic to many eaters) but tasty looking $20 feast on the cheap is pictured directly below. Below it is the higher-end, gourmet quality menu on the cheap.

Twenty bucks can buy lots of good, cheap eats, as the graphic above shows, if one knows how and where to shop, along with being able to cook, or learning to do so. Click on the graphic for an enlarged view. [Graphic source: New York magazine.]

The chef put together this three-course gourmet dinner, plus wine and desert, for $20. That's value, considering the same meal would easily cost four to five times that amount at a white table cloth restaurant. Click on the graphic for an enlarged view. [Graphic source: New York magazine. Food retailers take note: value gourmet recipes are something consumers are looking for. A three-course gourmet meal promotion using the chef's concept above would be hot.

Consumers are searching out bargains today like food and grocery retailers and restaurant operators have not seen in decades.

At retail, store or private label brand sales are rapidly rising, as are items on promotion. Value is becoming the new black among American consumers, who are being pinched by a combination of soaring gasoline and home energy prices, rapidly-rising food costs, a credit crunch, increasing unemployment and job security, dramatically lowered housing values, and now what looks to be rising overall inflation overall as well.

Good cheap eats no longer are merely for lower-income American consumers. For example, Whole Foods Market, which up until now has been fairly immune from concerns about food prices from its consumer base, has launch what it is calling its "Real Deal" program. The supernatural foods grocer is lowering prices throughout its stores, offering more and deeper price promotions and has even created "value scouts" in-store, who help shoppers find deals and values being offered in the stores.

Mid-range casual dining restaurants like Applebee's for example in the U.S. also are drawing more diners, while higher-end restaurants are putting more basic, lower-priced items on their menus because even affluent consumers are feeling pinched in the down U.S. economy.

As is often the case during bad economic times, behaviors consumers acquire--such as being more price and value conscious when it comes to food shopping and eating out--often stick even once the economy improves.

If true this time around, value and cheap eats could not only become the new black, but also could prove to be the biggest challenge--and as a result a real deal for consumers--to food retailers and restaurant operators in the U.S.

The natural, organic and specialty foods industry also needs to look more closely at how important price and value is becoming to most American consumers. Shoppers are trading down to discount supermarkets. Many are even shopping at salvage grocery stores, which are reporting sales increases of up to 15% in the last year, along with rapidly increasing customer counts in those stores, which sell discontinued, overstock and food and grocery items with slight label flaws.

Further facts: Two U.S. food and grocery retailing chains, Safeway Stores, Inc., which operates nearly 1,800 supermarkets across the U.S., and upscale eastern USA regional chain Wegmans, reported last week sales of their respective store brand grocery items are currently outselling national brands in the stores, both retailers attributing the fact to the poor U.S. economy and consumers' search for greater value.

There's a tipping point at which even the most dedicated natural and specialty foods shopper will buy conventional over natural or organic, or specialty and gourmet. That tipping point in terms of price is unknown. Rather, its defined as "we know it when we observe it." In other words, as we see sales of natural, organic and specialty food and grocer items starting to remain static or even decline, which there currently are some signs of, we can assume price is the primary reason in this current poor U.S. economy.

Therefore, natural and specialty foods retailers and suppliers need to take value very seriously at present or they will lose market share which could take a decade or so to gain back.

We aren't ready to fully proclaim it yet, although we have proclaimed the "era of cheap food" in the U.S. is over...but Natural~Specialty Foods Memo is willing to go as far right now as to say we think the "era of good, cheap eats" may be just around the corner.

Retail Intelligence Guest Memo: Researchers Honing in on Ways to Use GPS Data to Pick Retail Store Sites, Better Understand Consumer Behavior

Gregory Skibiski, left, and Tony Jebara of Sense Networks, a company that uses location data to make recommendations for businesses and consumers. [Photo: Suzanne De Chille/The New York Times.]

By MICHAEL FITZGERALD
The New York Times
June 22, 2008

THAT hoariest of real estate truisms — location, location, location — may soon be a clarion call for all sorts of businesses.

We’re in the midst of a boom in devices that show where people are at any point in time. Global positioning systems are among the hottest consumer electronics devices ever, says Clint Wheelock, chief research officer at ABI Research, a technology market follower. And cellphones increasingly come with G.P.S. chips. All of these devices churn out data that says something about how people live.

Such data could redefine what we know about consumer behavior, giving businesses early insight into economic trends, better ways to determine sites for offices and retail stores, and more effective ways to advertise.

Just this month, the journal Nature published a paper that looked at cellphone data from 100,000 people in an unnamed European country over six months and found that most follow very predictable routines. Knowing those routines means that you can set probabilities for them, and track how they change.

“What we do is really not random, even though it may appear random,” says Albert-László Barabási, a physicist at Northeastern University who is one of the paper’s authors.

It’s hard to make sense of such data, but Sense Networks, a software analytics company in New York, earlier this month released Macrosense, a tool that aims to do just that. Macrosense applies complex statistical algorithms to sift through the growing heaps of data about location and to make predictions or recommendations on various questions — where a company should put its next store, for example. Gregory Skibiski, 34, the chief executive and a co-founder of Sense, says the company has been testing its software with a major retailer, a major financial services firm and a large hedge fund.

Tony Jebara, also 34, the chief scientist and another co-founder of Sense, said, “We can predict tourism, we can tell you how confident consumers are, we can tell retailers about, say, their competitors, who’s coming in from particular neighborhoods.”

Mr. Jebara, who is also an associate professor of computer science at Columbia University, says the key to drawing such conclusions starts with having very large sets of data that go back several years. Sense’s models were developed initially from sources like taxicab companies that let it look at location data over such a period. Sense also uses publicly available data, like weather information, and other nonpublic sources that it would not disclose. “We had three-quarters of a billion data points from just one city,” Mr. Skibiski says.

Mr. Jebara’s statistical models interpret those patterns and look at whether they correlate with things in the real world, like tourism levels or retail sales. The algorithms are complex. Even so, the model doesn’t work for everything Sense tries it on, often because more data is needed. But Mr. Jebara says that when it has the data, the model works well. Several hedge funds made an investment in Sense earlier this year.

The Macrosense tool lets companies engage in “reality mining,” a phrase coined by Sandy Pentland, an M.I.T. researcher who was also a co-founder of Sense and now advises it on privacy issues.

Sense is not the only company engaged in reality mining. Inrix, a Microsoft spin-off, uses traffic data to predict traffic patterns. Path Intelligence of Britain monitors traffic flow in shopping centers by tracking cellphones.

Reality mining raises instant questions about privacy, especially when cellphone data is involved. In the United States, it is illegal in many cases for cellphone companies to share customers’ location data without their consent.

Mr. Skibiski says that Sense is interested only in aggregate data and that it’s looking for broad patterns, not the specific behavior of individuals. But he recognizes the privacy issue. He says he believes that people should own their own data, control when it is disclosed and receive some remuneration for it. His original idea in 2002 was to pay people for their data, but a formula for doing so proved too complicated.

Instead, Sense decided to trade services for data. On the same day it released Macrosense, it announced a new software package called Citysense, which uses location data to show where people are going, say, for nightlife, and maps their activity. Consumers who have iPhones or BlackBerrys can sign up for the service, which does not ask for personal information. Over time, the software will learn their patterns and recommend places they might like to go, or show them where other people with similar patterns are going. If they want to purge their data, they can do so at any time. [Click here to view Blackberry graphic.]

There’s little doubt that products we use everyday, like our cellphones or cars, will increasingly allow for us to be tracked. And after years of hype, there also seems to be demand for services built around location. Gartner, a technology researcher and consulting firm, says that the market — which includes various navigation and search devices and subscriptions and services — will nearly triple in revenue this year, to $1.3 billion from $485 million in 2007, and will reach $8 billion in 2011.

Annette Zimmermann, a Gartner analyst, says Macrosense seems to have a novel offering, one with a potentially large market.

“So many companies are just sitting on data” that they can’t do much with, she says. That could make Macrosense a powerful tool.

Still, Sense’s model is not a sure thing.

“The reality is that location data is new, and we don’t have 10 years of history to work from,” says Ted Morgan, the chief executive and founder of Skyhook Wireless, which sells a service that lets people use WiFi network access points to get information about their location.

“But if their algorithms can do the things they say, we’d probably do a lot with them,” Mr. Morgan says.

Michael Fitzgerald writes about business, technology and culture. E-mail: mfitz@nytimes.com.