September 2008 - Marketing Methods

Trading Down

By Peter Koeppel

There has been a radical shift in consumer purchase behavior this year, with many consumers trading down from SUVs to economy cars, from designer labels to private labels and to discount stores from higher-end retailers. A combination of high gas prices, higher food prices, falling home values, tighter credit and falling stock prices have led to a significant drop in consumer spending for the first time in many years, according to a recent Wall Street Journal article. “Consumers are moving from availability to affordability,” noted Thom Blischok of Information Resources, Inc., which tracks consumer spending. The WSJ story also reported that consumer confidence has dropped 38 percent since its peak in January 2007, with 57 percent of consumers stating in an annual survey that their financial situation had worsened, the highest figure since the survey began in 1946.

The radical downward shift in consumer spending has benefited Wal-Mart and discount stores such as Dollar General and Family Dollar Stores, which have experienced increases in sales this year. American car manufacturers have been particularly hard hit by consumers’ rapid move to smaller cars from gas-guzzling SUVs, with both Ford and GM posting record losses. However, Japanese car manufacturers Toyota and Honda have seen gains, at least with certain key vehicle models. The Toyota Corolla has become the best-selling car in the U.S., surpassing Ford’s F-150 pickup.

Several trends are emerging in terms of consumer purchase patterns. They are doing more one-stop shopping-for example, buying groceries only once a week to save on gas, buying in bulk, using more coupons, buying more affordably priced items that appeal to convenience versus value and buying more private label store brands than name-brand products.

As noted in the WSJ article, retailers are reacting to these changes by discontinuing products that don’t have mass appeal, building smaller stores that stock fewer products to cut overhead and improve margins, stocking stores with more multi-pack items at the start of the month when consumers are paid and then stocking more individual items at the end of the month, when budgets are tighter. Savvy marketers are developing products that appeal to these new trends in consumer purchase behavior. For example, some are offering lower-priced versions of premium products-and stocking it next to the premium product-in hopes of influencing consumers not to switch to another brand.

Retailers and product marketers who don’t adapt quickly to this radical shift in consumer purchase behavior will find themselves at a severe disadvantage versus their competitors. For example, Sears and Kmart saw their sales fall simply because they were not stocking the type of merchandise that consumers wanted. In contrast, Wal-Mart was able to refine their merchandise mix and have seen sales increase. Staying a step ahead of the competition is more important than ever to survive in today’s challenging retail environment.

Peter Koeppel is president of Koeppel Direct Inc., a full-service media buying agency based in Dallas. He can be reached at (972) 732-6110, or via e-mail at [email protected].

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