U.S. Consumers Planning Dramatic Shifts in Personal Spending: Study

L.E.K. Consulting, the global strategy consulting firm, announced today the findings of a proprietary Consumer Sentiment Study based on a demographically balanced set of 2,000 U.S. households. Results show that consumers are planning dramatic shifts in their personal spending through the end of the year and into 2009. These anticipated shifts in spending vary by category, but the changes appear to be more lasting than in previous downturns.

L.E.K.’s research confirms that people:

• feel their personal financial situation has worsened dramatically,

• are determined to get their financial house back in order, and

• have made specific plans to alter their buying habits to achieve that goal.

Personal Savings vs. Personal Consumption

Until the recent disruptions, consumers believed that they were accumulating wealth in real estate and the stock market—and this persuaded them to save very little and spend a lot. As a result, over the past six decades, personal savings declined significantly, while personal consumption rates continued to increase.

This consumer research suggests strongly that at least in the near term, both of these trend lines will reverse direction, perhaps dramatically. An end to “easy credit” will certainly have an impact, but there appears to be an even broader psychological shift at work. Savings will increase and consumption will decline commensurately.

“This trend represents a startling reversal, with huge implications for the economy,” said Andrew Rees, L.E.K. Vice President and co-author of the study. “If consumers do indeed move the savings rate back to the average over the past 20 years—around 7 percent—that will take between $115 billion and $120 billion out of the consumer economy on a quarterly basis.” He added, “In the short term, our research suggests they’ll probably do more than that. For instance, if they save at a rate of 10 percent, which has historic precedent, it could take as much as $200 billion out of the economy each quarter. The implications for the retail industry are enormous.”

To put that number in perspective, the entire consumer-stimulus tax package enacted last spring totalled less than $150 billion.

Discretionary vs. Non-Discretionary Expenditures across Retail Categories

The study findings further revealed how consumers rated various categories of expenditures from “least discretionary” to “most discretionary.” Staple goods such as groceries, household cleaning supplies, and health products were rated least discretionary, while items such as jewelry, sporting equipment, and home décor accessories were rated most discretionary.

In analyzing these consumer choices, Dan McKone, L.E.K. Vice President, and co-author of the study noted, “Not too many surprises here for most retailers and brand managers. But digging down deeper, our research reveals a host of interesting choices that consumers are now making about their purchases. For example, although “Cosmetics” and “Intimates” rank fairly close together—that is, on the lower end of the discretionary-spending scale—it turns out that consumers intend to cut their spending on cosmetics by less than 10 percent, but are prepared to cut their spending on intimates by between 10 and 20 percent: i.e., twice as much. Therefore, consumers may define cosmetics as “discretionary,” but they’re not yet prepared to give them up.”

Implications for the Retail and Consumer Products Sectors

Ultimately, some retailers and brand managers are simply hoping for the best—i.e., adopting short-term tactical measures and praying for a quick recovery. But all indications are that this recession will be longer and deeper than those in recent memory. And as we all know too well, consumer confidence drives the retail and consumer products sectors—and consumer confidence has fallen to levels not seen in decades.

To help retailers and consumer products players successfully manage through the downturn and be positioned for growth in 2009, Rees and McKone recommend the following:

• Quickly recognize the current slow down in consumer spending is likely to be sustained

• Ensure cost cuts and capacity are consistent with these new revenue realities
• Look for opportunities to enhance strategic position relative to competitors
• Explore incremental opportunities in adjacent segments

About L.E.K. Consulting
L.E.K. Consulting is a global strategy consulting firm that specializes in corporate strategy, transaction services, and performance improvement. Founded in 1983, L.E.K. currently employs over 900 professionals in 20 offices worldwide. Global clients include Fortune 500, FTSE 100, Eurotop 300, and many of the largest firms in Asia-Pacific. With a reputation for solving the most complex issues, L.E.K. collaborates with business leaders to accelerate the pace and precision of strategic decision-making. www.lek.com