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BUY ME!

NEW WAYS TO GET CUSTOMERS TO CHOOSE YOUR PRODUCTS AND IGNORE THE REST

By MARSHAL COHEN

The McGraw-Hill Companies, Inc.

Copyright © 2010 Marshal Cohen and The NPD Group, Inc.
All rights reserved.
ISBN: 978-0-07-166783-8

Contents

IntroductionPART 1 THE NEW ECONOMYChapter 1 The Age of ThriftChapter 2 Economic DistractionsChapter 3 Change in ConsumptionChapter 4 The New Retail RulesChapter 5 The Seven Stages of BusinessPART 2 THE NEW CONSUMERChapter 6 New Committed ConsumerChapter 7 The Global ConsumerChapter 8 Shift to AccessoriesChapter 9 Seasonless MerchandisingChapter 10 Gender BenderChapter 11 Booming BoomersChapter 12 Influence the InfluencersChapter 13 Somebody Help MePART 3 THE NEW BRANDChapter 14 Tip-Top TechChapter 15 Luxury: A Tiffany MomentChapter 16 A Little Bit of Privacy Please!Chapter 17 Turning Adversity into Opportunity TipsConclusionIndex

Excerpt

CHAPTER 1

The Age of Thrift

How aware are you of these terms?

• Frugal fatigue

• Pent-up demand

• False wealth

• Great Compression

• Conspicuous consumption

• Necessity vs. desirous spending

• New retail rules

• Consumption coma

You need to be. In order to survive in the “new” world today, you need tounderstand the dynamics of the second most dramatic shift in consumer behaviorin modern times. The combination of Great Depression and the growth thatfollowed it resulted in the most massive shift in consumer behavior that historyhas ever seen. And now, we are caught in the tide of a shift of lesser, thoughstill significant, proportions: the Great Compression of 2009.

While I think the Great Depression is, by now, something about which most peopleshare a collective knowledge, the Great Compression is not. I define it as: Thesimultaneous squeeze in pricing, the housing market, and the credit market, allof which act together to put the squeeze on the consumer. Lest we forget,consumer spending makes up about 70 percent—almost three-quarters—ofour economy, according to some estimates.

While the current Great Compression is by no means comparable in size or scaleto the Great Depression, we can’t dismiss the fact that we are witnessing themost dramatic change in consumer behavior in decades. After almost 11 years ofamazing, consumer-driven economic growth, the fall has come. I don’t think thisfall is all that bad, mind you. We have been living on both borrowed time andborrowed money, and it was all but inevitable that the end would come and ourbloated economy would get the cleansing it so sorely needed.

As the world celebrated the new millennium, Americans enjoyed continued growthin its economy. There was one major interruption, on September 11, 2001, butAmericans showed their amazing resilience and recovered quickly. That resilienceset Americans right back on the track of unprecedented growth in all areas ofconsumption—a consumption that knew no boundaries and spread throughoutevery demographic profile of consumers: the rich, the poor, the young, the old,all ethnicities, and even all regions. They all posted a prolonged period ofgrowth. The momentum of this continued economic growth, however, is whatsubsequently caused the huge downturn of 2008. Why? We’ve been living on aclimbing roller-coaster. The upward climb was high and steep, and it had to peaksooner or later. And while it is true that everything that goes up must comedown … it is also true that the higher the peak, the steeper the drop.

In this book we will explore how we plunged into the Great Compression, thechanges we will be living with, and how we as business leaders can adapt to andlearn from those changes. But perhaps most importantly we will examine how wecan turn adversity into opportunities. Yes, there are opportunities all aroundus. I see them all the time. In fact, I have been working with many managementteams over the past year, helping them analyze their businesses and find ways togrow in this challenging market. It is so rewarding to see a company set a newcourse and focus on moving forward. It resolves to uncoveropportunities—and then it actually acts! Consumers benefit, the companybenefits, and often careers are made.

This is a time like no other. Companies have opportunities to rise abovemediocrity and position themselves above the crowd. Now is when you can easilymake your mark in your field. While your competition sits and waits for theeconomy to recover, you can begin to build your path to the future immediately.Be ready, and be in position to take advantage when the economy rebounds. Evenas I write this, the economy already is showing signs of stabilization that willlead to recovery and ultimately growth.

I say to all of you who are stuck: don’t be. Get out of the quicksand and takethe first step. Don’t sit idly by, waiting for someone or something to lead theway. Make a move! Take a step. Even if you need a midcourse correction, youstill will be ahead of the competition and poised to take advantage of whateveropportunities the market has for you. So let’s go and explore how you can takesome key steps that will transform this challenging time into one ripe withopportunities. Ready?

LEARNING FROM THE RECENT PAST

In August of 2008 it became very clear that the economic tide had changed.Consumers, believed to be the pillars of the economy (remember they account for70 percent of our economy), started to show some signs of a change in behavior.In fact, their spending was shifting in huge ways. Due to the enormity of theconsumers impact their purchasing behavior was going to become the mostimportant indicator of our economic climate since the dot-com boom went bust.

What I saw back in August 2008, during that all-important back-to-schoolshopping period, were consumers who were not in a hurry to go out and startspending. They were telling retailers that they needed to be “incentivized”before they would start shopping. They were going to wait until retailers beganoffering price discounts and other buyers’ benefits before they would beconvinced to purchase products beyond just the essentials. Gone were the dayswhen consumers would spend freely, without regard for a budget. Consumers’newfound constraint during that back-to-school retail season reflected a majorshift in their purchasing priorities. Spending during that back-to-school seasonshowed no growth for the first time in a decade. It became clear to me thatconsumer behavior was about to shift dramatically, but no one could anticipatejust how big that shift would be.

Let’s fast-forward just one month, to September 2008, when the lull in retailspending across all industries made it very apparent that we were in the midstof a recession. I recall being on air with Bloomberg Television and speakingwith anchor Kathleen Hayes. She asked me what it means when consumers curtailtheir spending so much that retail is affected across the board. I used the wordrecession. You could hear the entire listening audience gasp. Yes, Ireally put that word out there. I’ll admit, I said it: the “R” word. I toldKathleen that we were in a recession, but that no one wanted to call it thatjust yet. I recall saying that the government would officially tell us we werein a recession when we hit the second successive quarter of negative growth ofgross domestic product (GDP), but that by the time the recession was called, weactually would have been in it for seven months or more. I also recall sayingthat it would be best if we found out we really were in a recession and beganworking toward getting out of it.

Kathleen and I continued our on-air conversation, discussing how confident I wasthat we were in a recession and how we got to this challenged economy in thefirst place. I reminded Kathleen about what I call “false wealth,” thephenomenon created by all those lovely newly formed banks, like Countrywide,that were offering what are now called “liar loans.” These institutions weremaking liar loans to home buyers at 120 percent financing, which in turn broughtan average of $60,000 of “spending money” per buyer. This “extra” $60,000 wasall “found money.” Regardless of whether they had just signed their firstmortgage, were trading up, or were trading down, these home buyers were offeredmoney beyond the purchase price of their home with little regard for theirincome or how they were going to pay it back. Of course, not all home loans werethis reckless, but even the more secured loans were offering home buyers theopportunity to borrow more money than they really needed. It seemed like thegift of a lifetime. It was like “free money,” and everyone was doing it, sopeople found themselves asking, “Why not me?” And who could blame them fortaking advantage of these loans? After all, they were being advised to take outmore money than they needed by “the experts.” The banks used so-called liarloans to create a feeding frenzy that even long-term conservative institutionsfound too attractive to avoid. And when the found money from consumers who wererefinancing their homes or signing reverse mortgages was added into the mix, theeconomy was hit with a double whammy. Suddenly over a quarter of a trilliondollars was injected into retail spending and investing from consumers who justa few years ago barely had two nickels to rub together.

Do the math if you don’t believe me. Roughly five hundred thousand newlyconstructed homes and five hundred thousand existing homes were sold in 2007,totaling approximately 1 million home sales. Now take those 1 million home salesand consider the fact that the average selling price for a home in the UnitedStates in 2007 was $300,000. Since 120 percent financing deals were the norm forhome purchases made in 2007, figure that each buyer borrowed about 20 percent inextra money—roughly $60,000 per $300,000 home sale (20 percent x $300,000= $60,000)—against his or her home.

Multiply the average amount of financing per home sale by the number of homessold in 2007 ($60,000 x 1 million) and you get $60 billion. When you add in allthe reverse mortgages and second mortgages that were signed during 2007, youhave the potential to reach another 1 million borrowers, which tacks on anadditional $60 billion to the mix. We are at $120 billion. Yes, that’s $120billion in just one year. With 120 percent financing being practiced for a fewyears before the bottom fell out of the real estate market, that $120 billionper year adds up awfully quickly. Between the years of 2003 and 2007, over halfa trillion dollars were injected into retail with little regard for its cost,value, and origin, which is why I call this time span “the era of spending withreckless abandon.”

WHAT DOES THIS ALL MEAN FOR BUSINESSES?

We’ve identified that a massive amount of money was introduced to consumers,which they then introduced into the economy. But what happened with this moneywas not a normal path of consumption. Consumers didn’t use the money to pay downtheir already overleveraged debt. They didn’t use it to pay down their mortgagesor pay off their other debt. They spent it. They spent it in ways that wouldreward them. They used it to live more lavish lifestyles. Consumers spent it onhigher-end products. They spent this newfound wealth like drunken sailors onshore leave after payday. Consumers were spending the money on home renovations.They purchased big-screen televisions and then decided, hey, why not buy a hometheater system? McMansions needed to be furnished and equipped with the latesttechnology and gadgets. Appliances bearing expensive finishes like stainlesssteel were soaked up. Or how about those fancy, new, colored washers and dryersthat have front loading? The thinking was: let’s go out and get one of those,too.

Consumers desired luxury in items as simple as countertops, and so began anupswing in the use of granite or synthetic stone. No Formica for this new cropof homeowners! Formica might have been fine when baby boomers were growing up,but these consumers were concerned about “the resale value” of their homes;therefore the new norm was to install stone countertops and kitchens fit for acelebrity chef. And of course the bathrooms had to be upgraded or built to looklike the ones found in a five-star hotel. Nothing less would do. Garages had tohave storage systems as wonderful as the cabinetry you’d find in the kitchen.Media rooms had to be outfitted to offer simultaneous viewings of multiplefootball games on a weekend or equipped to provide the experience of a realmovie theater when the latest DVD was popped in for the kids. These luxuries allbecame must-haves in this new world of conspicuous consumption.

If you consider this trend of consumer behavior and buyers’ new fondness forluxury in the contexts of fashion and technology, you will quickly see how webecame enmeshed in our conspicuous consumption.

Consumers were able to justify buying designer handbags, first for $300, thenfor $500, until eventually even $1,000 handbags were okay. The price of jeansrose to over $300, and kids—yes, kids—were able to convince Mom orDad that they couldn’t live without their pair of preference. This was not a newphenomenon. We saw this kind of consumer behavior a decade earlier with athleticshoes, when teens were spending over $100 for basketball shoes in which they hadno intention of playing basketball. But it was different this time: it washappening everywhere and with everyone. The notion of “thrift” as a word,concept, or practice was all but extinct. Extravagance became the new norm.

Consumers were driving the economy like never before. Thanks to consumers’exaggerated spending and “false wealth,” certain businesses began looking veryattractive, prosperous, and successful. Unfortunately businesses were unaware ofjust how vulnerable consumers’ false wealth was making them. They were relyingon consumers that were lacking a proper foundation to support the continuationof their extravagant purchasing behavior. Consumers were driving the economyalong, but not for long. Eventually their home loans would have to be adjustedand paid back. This new source of money would dry up. Consumption would dropoff. And it surely did.

By the time October 2008 rolled around, with the holiday season rapidlyapproaching, the consumer was tapped out. The banks had fallen prey to theirgreed, the housing market dried up, credit stiffly tightened, and consumers losttheir Wheel of Fortune. Moms and dads found themselves struggling to figure outhow to pay the mortgage, the electric bill, the credit card bills, and a host ofother expenses. Households worldwide were faced with the hard truth: there wasno more false wealth. And with that, consumers started cutting back—andcutting back fast. Awaiting deals and discounts, parents delayed theirback-to-school spending, and in some cases they did not spend at all. Kids werestarting the new school year with last year’s backpack, some with no or very fewnew items in their wardrobes.

The new era was upon us. Even still, so few saw the warning light. With asluggish back-to-school season in 2008, it was easy to predict the consumerspending turnout for the upcoming holiday. I called it “a red Christmas” and a”hesitation holiday.” This, I predicted, would be the holiday that spendingwould be very late in coming and in some cases would barely show up at all. Thatis exactly what happened. Consumers had adjusted their spending, but by the timeretailers’ sales figures reflected this shift in consumer behavior, we werealready well into the holiday season. Retailers had no time to react to theconsumer cutback, which was the first deep decline in U.S. spending in almost adecade. They were committed to their orders, and their inventories were poisedfor a typical postmillennium holiday season of growth. Even the holiday seasonof 2001 had posted growth, despite the impact of the events of September 11, sowhy not now? “After all, just because it was a challenging back-to-school seasondoesn’t mean that we’ll be affected now,” many retailers believed.

Well, the perfect storm showed up that holiday. The housing market was tanking,credit dried up, consumption slowed to a screeching halt, the consumer all butdisappeared, and the retailers had inventories that could choke a horse. (Now,understand, I live on a horse farm, and all that those horses do is eat andgraze, morning till night, so enough to choke a horse is a lot!) Inventorieswere at the optimal level for a normal market, but the market was subpar. Thetricky timing of this consumer pullback made it hard for retailers to read. Ifconsumers had cut back any earlier in the year, holiday season inventories wouldhave been adjusted accordingly. But timing wasn’t on the retailers’ side. Somuch inventory and so few customers led to discounts of a lifetime. To keepinventory in line, retailers were forced to discount their merchandise atrecord-breaking levels. Sales with discounts of up to 75 percent off were almosteverywhere, and some stores even threw in an additional 25 percent off on top oftheir already discounted prices in order to move merchandise.

For retailers, the goal became to get whatever revenue you could for yourmerchandise at any price you could sell it. The thinking was: get inventories inline and generate whatever revenue you can to survive the holiday storm. The2008 holiday retail season gave consumers the greatest bargains they likely willsee in their consumption lifetimes, but not many had the finances to takeadvantage of the deals.

The events leading up to the Great Compression of 2009 brought about a dramaticchange in consumption as we had known it, a change that spread to all incomelevels as consumers (even those with money) prepared for the other shoe to drop.Their wealth was diminishing right before their eyes, through the decliningvalue of their stock portfolios, their homes, or both. Even the wealthy didn’tfeel so wealthy. Consumption as we knew it was about to change in a way thatmost people had never seen. Every purchase was scrutinized. Every purchasewas evaluated, and if it was not an absolute necessity, it was put off.Consumers went from spending with reckless disregard to buying necessitiesonly.

The retail world was not equipped to handle such a dramatic shift in consumerbehavior, nor was the manufacturing world. From clothes to cars to electronicsto elevators, companies would have to adjust to less. Less-than-expectedsales, less-than-expected construction, and less need became the new world withwhich businesses would have to wrestle. Jobs started to fall by the wayside, andalongside the decline in jobs dropped consumer confidence, which reached an all-time low.

We have been tracking consumer spending behavior for over 50 years at NPD. InJanuary 2007, we began analyzing consumers’ psyches and asking specificquestions about their views on both the state of the economy and the security oftheir jobs. The purpose of our study was to gauge how consumers were feeling atany given time about the stability of the economy.

NPD launched this study right around the time I began to realize just how muchmoney was being injected into the marketplace through the false wealthphenomenon. My concern was that we, as consumers, were living on a prayer andwould not be able to sustain the level of consumption we had reached in 2007. Iknew that once consumption began to dwindle, the implications would be far-reaching, so to measure both consumption and the mindset of the consumer, Icreated a measuring stick and called it the Consumer Spending Indicator. Whatthe Consumer Spending Indicator measured was how comfortable consumers were withthe state of the economy, their income, and the security of their jobs. Itproved to be a most valuable tool, and it is what enabled me to accuratelypredict the economic downturn to the exact month of its onset.

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(Continues…)Excerpted from BUY ME! by MARSHAL COHEN. Copyright © 2010 by Marshal Cohen and The NPD Group, Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc..
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