Persistent U.S. Consumer Frugality May Hurt Asian Profits

The frugal habits adopted by U.S. consumers during the economic crisis of 2008-2009 have continued and even deepened in some cases, and may be here to stay, according to the latest annual survey of 2,000 consumers by global management consulting firm, Booz & Company. This may not be good news for Asian companies who thrive on the consumption of the U.S. market.

 

The third annual Booz & Company consumer spending report reveals that U.S. consumers continue to feel they are on shaky ground — fueled by high unemployment and feelings of uncertainty, even among those who are employed. As a result, consumers are economizing broadly, deferring spending on discretionary items, and trading down on essentials. In fact, most consumers cut back spending even more this year than last. The survey also found more affluent consumers are less willing to trade down on price or prestige than the less affluent.

 

Booz & Company Partner Nick Hodson said, “The new frugality that consumers reported last year — one that requires trade-offs between price, brand and convenience — has become dominant and ingrained behavior in several categories. Consumer products companies and retailers need to monitor and understand the evolving behaviors of different consumer segments and respond to each, category by category. Going back to business as usual is not an option.”

 

Cutbacks on Discretionary Spending

According to the survey, cutbacks on both discretionary spending and essentials this year were again significant, and even greater than the previous year.

 

On consumer electronics, 56% of respondents reduced expenditures vs. 53% in 2009. On health and beauty, 28% cut back spending vs. 25% in 2009. On household products, 28% reduced spending vs. 21% in 2009. On food at home, 28% cut back on expenditures vs. 23% in 2009.

 

Consumers also continue to trade down on essentials by switching to less expensive brands. For example, this year’s survey found that 39% continue to trade down on household products and 37% said they traded down on food at home, similar levels compared to last year’s survey.

 

More Affluent Less Likely to Trade Down

 

While U.S. consumers across the board continue to economize overall, spending behaviors are seen to vary among consumer segments. For example, more affluent consumers continue to defer purchases of discretionary items, but are not necessarily trading down in terms of price or prestige when they do buy.

 

Conversely, less affluent consumers (those with household incomes less than $100,000 per year) are more likely to reduce spending by trading down. According to the findings, approximately 55% of respondents said they had reduced their expenditures in discretionary categories such as consumer electronics and apparel during the past 12 months.

 

In non-discretionary categories, less affluent consumers were much more likely to trade down in brands or prestige than more affluent consumers. In household products, for example, 41% of less wealthy consumers traded down to cut spending last year, while only 30% of more affluent consumers took that step.

 

Approximately one third of consumers expect that their financial situation will improve in the coming year, a level of optimism similar to 2009.

 

Even optimistic consumers (those who think they will be better off next year) show little tendency to increase expenditures. In fact, less than 10% of all optimistic consumers surveyed plan to trade up in brands and only 15% plan to spend more in discretionary categories, despite having deferred purchases for roughly two years already.

 

In contrast, some frugal behaviors are not likely to stick as conditions improve. In discretionary categories including apparel, cosmetics, and alcoholic beverages, consumers often found that switching to cheaper brands was an undesirable trade-off and plan to switch back post-economic recovery.
 



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