Commentary

The Deleveraged Consumer

by Jose Villa , Columnist, January 22, 2009

At last week's National Retail Federation Conference & Expo in New York City, Carl Steidtmann, chief economist of consumer business at Deloitte Research, made a powerful and somber presentation on the state of the U.S. consumer, which drives much of the advertising industry. Steidtmann's thesis was simple -- consumers are being deleveraged of their purchasing power in transformational ways.

They are being forced to deleverage because of a massive destruction of credit, which was a direct result of an unprecedented debt-driven spending spree that occurred from 2001 to 2007. Steidtmann went on to forecast that unlike in previous recessions, consumers will not be able to return to their previous spending patterns after the economy begins to grow again, because they will no longer have access to the credit that fueled their hedonistic spending earlier this decade.

There is no doubt that Steidtmann has uncovered a fundamental macroeconomic truth that all marketers must come to understand. However, as a Hispanic marketer, my thoughts turn to Hispanic consumers and how they will fare vis-à-vis the broader deleveraging of the consumer market. This is an interesting question considering that Hispanics have traditionally had less access to financial products like credit cards and mortgages, which are the primary culprits behind this macroeconomic shift.

Let's take a look at some of the data.

Credit Cards

According to recent data from Experian Consumer Research, 58% of Hispanics have not used a credit card in the past 30 days, 42% of Hispanics don't like the idea of being in debt and 31% typically pay cash for their purchases. While a bit older, data from a 2004 Survey of Consumer Finances states that 80% of surveyed "general market" respondents said they use credit cards, compared to only 56% of Hispanic households.

Mortgages

Looking at Hispanics and the mortgage crisis paints a similar picture. According to the Bureau of Labor Statistics' Consumer Expenditure Survey (2006), more than 50% of Hispanics rent versus own their homes, compared to 30% of non-Hispanics (and this was at the height of the real estate boom). Moreover, according to a 2008 Synovate report, only 26% of Hispanics held a mortgage, compared to more than 50% of general market consumers.

Certainly a large number of Hispanics have been bitten hard by the foreclosure bug, in part because of their heavy subprime loan participation and the fact that they live in areas where the housing bubble was most pronounced. However, no matter how you look at the data, Hispanic homeowners are a minority -- only 26% hold mortgages (Synovate, 2008) and Hispanic homeownership only reached 6.1 million during the 2007 peak (U.S. Census), representing a small percentage of the 42 million-plus population.

So what does all this mean for Hispanic marketers and advertisers? Clearly, Hispanics, like everyone else in the U.S., are adjusting to the recession by cutting their spending. A report from the Pew Hispanic Center earlier this month confirms that Hispanics are reducing remittances, cutting back on eating out, curtailing holiday spending and putting off car purchases.

However, as the economy inevitably turns the corner, Hispanics represent a stronger consumer segment than their general market counterparts, in no small measure because of their lack of debt. In a new consumer world order of overleveraged consumers, the Hispanic market represents a beacon of opportunity as a truly deleveraged consumer.

demographics

2 comments about "The Deleveraged Consumer ".

Check to receive email when comments are posted.

Jo Guerra from Your Marketing Gal, January 22, 2009 at 2:13 p.m.
What you say is interesting. I grew up in South Texas on the border of Mexico and the United States and started a jewelry importing business years ago. I never got a loan and even though I had a line of credit, I only used it once when I knew I could pay it back. Several of my foreign suppliers offered me credit and only when I knew I had the money, would I would take them up on it. I always paid them back way before the terms. Perhaps it was because I got into debt when I was younger, dug myself out and promised myself never do be in debt again. I financed my own company and grew it slowly. And I always kept an "open to buy" to keep my buying in control. On a personal level, I pay off my credit cards every month and keep a running tally of purchases.
Jo Guerra
www.JoJewelry.com
Reply

Tom Kadala from ResearchPAYS, Inc., January 23, 2009 at 3:01 p.m.

Interesting points... Thank you.

After reading this article I could not help but think of the millions of Hispanics who will celebrate their 18th birthday (in the next few years) by 'breaking in' their first credit card. Back in my days the credit extended to me for the first time amounted to just $1,500. I never requested the card. It just arrived in the mail. I'm glad it did. That's how I funded my first of many businesses.

Back then the banks had become complacent. The GDP needed new buyers to feed a growing economic engine. The strategy helped some and took down others. For those that failed bankruptcy lawyers waited on the sidelines like vultures.

About 10 years later, I predict deja vu all over again. Hispanics with low debt may appear as an asset to some (as stated in this article) but the reality is that Hispanics, by nature, usually operate as a community and not as individuals.

The potential misinterpretation by credit card companies who subscribe to the 'individual' Hispanic consumer theory, will extend credit freely the same way they did in the mid 1980's. The only difference this time might be that the credit lines will be higher for first time cardholders. Hey, prices have gone up since then.

How many young Hispanics will react to receivng their first credit card may surprise us all. That piece of the puzzle, I believe, will be both very different and defining of us. As for the bankruptcy lawyers on the sidelines, they may be disappointed.