According to the findings of McKinsey’s latest Consumer Sentiment Survey, because inflation-adjusted median household income has dropped over the past few years, consumers are feeling reluctant to increase spending and are instead remaining thrifty. While things aren’t getting worse, they’re not getting much better either, says the report. Consumer morale, although stable, remains stubbornly low.
Since the system is so heavily dependent on consumer spending, much depends on the level of confidence Americans have about their jobs, their cash flow, the value of discretionary spending, and the strength of the overall economy.
The latest report showed that many aspects of consumer sentiment indicated marked improvement. However, things have either plateaued or gotten worse. 39% of consumers are still worried about losing their jobs and 40% of the consumers surveyed said they are coping with the challenge of living paycheck to paycheck, up from 31% in 2012.
The significant economic pressure that families earning less than $75,000 a year feel has caused many of them to make spending adjustments in order to make ends meet. Roughly 40% of these households say they are making changes, including cutting back and delaying purchases, as compared with 22% of those in households earning at least $150,000 a year. Americans at all income levels have yet to return to their prerecession positive feelings about the country’s economy.
Feelings Of Economic Pressure (% Of Respondents; Sept. 2014)
Consumers Agreeing or Strongly Agreeing
Optimistic about country’s economy
Decreased ability to make ends meet
Living paycheck to paycheck
Somewhat worried about losing job
Not making some purchases because of uncertainty
Source: Mckinsey, September 2014
While the number of consumers cutting back on spending has stabilized, Americans are still pinching pennies. Decreasing purchases of high-end brands and doing more one-stop shopping to reduce the number of trips are just as popular as they were last year, with 40% of consumers saying they have cut their spending over the past 12 months, says the report. And, 55% of Americans say they continue to look for ways to save money, including paying more attention to prices, using coupons more often, shopping around to get the best deals, and buying more items in bulk.
Consumers are not returning to higher-priced options. Nearly three-quarters say they do not intend to go back to purchasing more expensive brands. One-third of Americans no longer prefer the more expensive brand, having realized that the cheaper product offers better value for the money, and is of higher-than-expected quality. Another 39% of Americans say they would like to buy the more expensive brand, but that doing so isn’t worth it.
The product categories in which consumers are most likely to trade down include cosmetics, over-the-counter medicines, household cleaning products, frozen vegetables, and cereal. On average, 55% of those who trade down say they have switched to private labels, with several exceptions. In the beer and cosmetics categories, just 18% and 26% of consumers, respectively, trade down to private label. The remaining consumers are trading down to less expensive branded products. However, says the report, in wine, beer, and skin care, some consumers are actually trading up.
48% of American consumers say they have spent more of their household budget online in the past 12 months; 34% have done more shopping at dollar stores, and 32%, more at club stores. Momentum here continues, since most consumers report more positive experiences than they expected in online and club stores.
Behavioral Expectations For Next 12 Months (% Net Expectations Next 12 Months)
Shop at dollar stores
Shop at mass merchants
Use internet to compare prices
Purchase private label/store brands
Compare prices while shopping
Shop at club stores
Use internet to buy products
Go out to eat
Purchase customized high-end products
Purchase high end brand
Source: Mckinsey, September 2014
Multiple years of austerity have left consumers with altered views about spending. Almost 40% say they will probably never go back to their prerecession approach to buying. 29% say they now have new attitudes and values about spending, up from 17% in 2010. An additional 24% claim that their opposition to increased spending is the result of a change in their economic situation.
In addition to the broad analysis of the American population, says the report, there are four key groups whose spending behavior and attitudes differ in important ways from the general population’s.
Cautious spending behavior is the new normal, concludes the report, and is unlikely to change in the near future. American consumers continue to cut back on spending by delaying purchases, trading down to lower-priced brands, and eating more meals at home. Results vary somewhat by different demographic segments. To win market share and create successful new products, consumer-packaged-goods companies need to look at consumers by cohort and understand where there are exceptions to rules about cautious spending.
The report was presented by Anne Martinez, a specialist in McKinsey’s Stamford office, Rukhshana Motiwala, a senior expert in the New York office, and Ali Sher, a consultant in the Chicago office.
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