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Who’s buying, who’s not and why do we care?

July 7, 2009

Sometimes Life has this habit of giving you time to get a concept, and when you run out the clock, it slaps you silly and then you do a ‘oh, yeah’ and it all comes clearly into focus. We’re hearing a bunch of consumer and business buying input from our various clients and strategic partners, and we were trying to paint a macro picture which could then become the basis for some thought and planning. It was clear as mud until it all came together based on a recently published study.

Based in Tel Aviv of all places, this research manipulated price factors on a restaurant menu to see if people would be swayed into ordering based on price (and the perception that you’re a big spender and therefore an Alpha) or personal preference.  Now it’s well known that if you give someone a placebo but tell them it’s a million dollar a shot painkiller, you can cut off their leg without even a whimper and you can give someone a glass of wine with the potential to wipe out their retinas, but if you tell them it came from a $100 bottle, they’ll ask for more.  But with this new research, it looks like people buy equally based upon being perceived as a heavy hitter and by personal preference.  Given our ’recession’ (this is like calling the Titanic’s final plunge a ‘course adjustment’), this latter finding is troubling for the long haul.

So, in the spirit of the cosmos supplying even more data when you’re on the right track, the WSJ, on Sunday, July 3rd , had a troubling and illuminating chart on unemployment rates based on age ranges, and we’ve incorporated the information into this blog posting.

Consumers can be stratified into 3 distinct categories, each with their own recession strategy.

The Still Employed Middle Class – buying value over prestige

Yes, there is a 10% jobless rate, but that means 90% of us are still working at our regular jobs without much economic variations.  These people feel their jobs are secure but are now looking at two criteria in everything they buy.  First, they demand a great deal, as in ‘if I have cash and will buy, you had better make it very worthwhile because if you don’t, your competitor will’. Secondly, they realize all expenditures are crucial these days, and have cut back on excessive debt and spending for fun’s sake, and so demand quality in all products and services. Even these people are not spending borrowed cash, as in the case of home improvements funded by second mortgages.   In December of 2008 I went to my kitchen designer/contractor and noticed his job scheduling board was basically empty for January, 2009 and onwards.  I’d be afraid of looking at it if I went back today.  If you’re trying to sell far of and exotic vacations at list price, it must be a fun time for you. If a cruise line can cut their prices to basically the cost of floating you and your belongings around the Caribbean, there must be huge pressure to fill boats with those who will still splurge from their own earnings. This group remains large but there are some 8,800,000 unemployed between the ages 24-54, ie the best years of one’s careers and earnings potential.

Food is safe, but even supermarkets are changing.   My local A&P is offering 5 12-packs of a brand name soda for $10 if you’ll spend $25 in their store.  Never mind the Starbucks coffee shop near the exotic produce, or the flowers from all over the world.  They want you to come in and buy your basics there, i.e. it’s back to thinking about value, not luxury.

The Still Employed but with Diminished Incomes –  trading down, perhaps never to come back

Those people with limited earning power are trading down, moving from premium brands to value brands, which may mean changing long standing brand loyalty and to you, lower revenues.   Two complications come to mind.  First, since the study clearly said people buy both by perceptions but equally by what they like, what happens when the majority of your loyal customers think your value brand, at a lower price point, is just fine for them?  And therefore, secondly, how do you manage the value brand so they stay with your company but you can still woo them back when the economy improves?  We explored this before in theory, but now it’s an operational and strategic imperative.  To stick with our food example, do you make your value brand of equal quality but with its own distinct taste, which still has to be attractive so as not to damage your overall name?  Or, do you heavily discount your premium brand, hoping to keep these consumers, and if so, at what point does discounting ruin brand equity?

Perhaps the best means to a value brand is to redefine your premium brand product from exclusivity (only a few can afford to buy this or you are part of a small exclusive group smart enough to like this taste and the 1000 ingredients it took to make it) to pure functionality.  For example, you can buy a mass market luxury watch such as a Movado or even a Rolex for their accuracy, but let’s face it, a $10 electronic watch is just as, and perhaps even more, accurate.  So, if you go to a value branding strategy, you might consider a new line of action watches, stressing pure timekeeping geared to various sports, utilizing less expensive innards and housed in cheaper but stylish cases.  Sell them as being great for 3 years of hard play by active, vital adults, and not as heirlooms to be passed on.  In food, you would create a product with its own taste and emotional payoffs such as ‘pure’ and ‘organic’ and great price for value, which make you look smart.  In sum, you’re proud to buy this value product; you’re not slumming it.  Tell me the Honda and Toyota hybrids, selling at inexpensive price points and stressing applicability to our economic and environmental times, are not perfectly positioned.

There are two big issues here:

1-     The finding from the Tel Aviv study – once they have found perfectly good substitutes to premium brands that still make them feel good about themselves, how exactly are you going to get them to open their wallets wider post-recession? Good bye all that investment in branding, good bye higher margins and finally, good bye the corporate largess allowable when the cash was flowing in without much effort.

2-     The info from the WSJ chart – roughly 9,200,000 men and women are working but at severely reduced hours.  Take that much buying power out of the workforce, and add in some PTSD for being on the verge of jobless and the impact on consumer behavior will be long lasting.

The Economically Hard Hit – goodbye for ever?

The next category is those people with severely limited finances, and not just UAW members, but Realtors, commission sales reps and others with activity based incomes.  These people are economizing down to house brands and near substitutes.  Of course, since many house brands are perfectly fine these days, this large group of consumers may be off your sales forecasts permanently.  It can take years for the trauma of being on the economic cliff to wear off to the point where they will consider moving back upscale.  How do you reach them and keep them in the fold?  This is the time to make an investment, so they still feel connected, remember the good old days when they purchased your product, and aspire to get back to where they were as soon as they can.  Only in this case, the new definition of upscale for most of these people may be your value brand.

Here, the WSJ chart is illuminating – approximately 29,560,000 workers are unemployed or just marginally attached to the labor force (many of these may be people who gave up looking, such as the 358,000 who gave up looking in June, and my guess would be this is a hidden population, i.e. it happens each month).

One final piece of input – this past weekend, my wife and I went to the Chesapeake and all was great, the hotel being full of the 90% still working and their families.  One morning, the underlying truth came out.  Next to us was a couple, like us in their 50’s, who said they would ride this out as long as they could, but their steam was gone. It was not about fixing the economy or refocusing the country, it was about not caring other than remaining employed.  In fact, their daughter, a very successful mid 30’s lawyer, was just laid off from a very tony, white shoe firm and would probably be moving in.  Their passion was gone.  No large purchases on their horizon other than going to this hotel a few times a year for a weekend to unwind, and that was now becoming optional.

If this is what we can expect from our most experienced talent, who are obviously successful, then long-term buying behavior has changed for a long time and those value brands had better be a central part of your product portfolio and not just an entry ramp to your higher margin, premium offerings. Or, to put it more broadly, if the average annual wage in the US, as of June, is now around $31,000 (and dropping), at today’s unemployment rate, that’s $916,360,000,000 of buying power out of the economy.  The chances of all that money returning in the near term is very low with a high probability that anyone who returns to the economy will be unlikely to overspend for a long time.

It’s time to rethink on adjusting your entire company to a new, non-premium, value focused operating model for near, medium and probably long-term survival. Lean Manufacturing meets Lean Office and Lean Sales.

Rich Eichen is a Managing Principal of Return on Efficiency, LLC, who’s website is www.growroe.com and is one of their senior turnaround leaders/CROs, Program and Interim Executives with over 25 years experience reshaping companies and key initiatives as well as operating units of Global organizations. He can be reached at richard.eichen@growroe.com

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