The Shopper of Tomorrow: Trading Down

Attention Shoppers: We no longer have the following items — “a sense of entitlement,” “conspicuous consumption” and “a golden period of luxury.” At least that is the word from Wharton faculty and other experts who point to a new logic that is defining not just what U.S. consumers buy, but how they view the shopping experience.

While shoppers typically pull back during the downward phase of any economic cycle, the severity and uncertainty of today’s crisis is likely to have longer-lasting effects on their attitudes than most slumps, these experts note. Consumers, they suggest, will eventually start spending again, but without the vigor enabled by easy credit in the Roaring 2000s.

“The Great Depression certainly changed consumer behavior and attitudes for a generation,” says Wharton marketing professor Wesley Hutchinson. “It’s not obvious that we will have that psychological scar, but there is precedent for a very large shift.”

Over the next 18 months, Hutchinson predicts, consumers will learn to become more frugal and are likely to carry those skills over once the economy recovers. “At some level, everybody has now been schooled about financial markets and overextending one’s credit — something American consumers have been notoriously bad at. We had a habit of not paying a lot of attention to the cost of using borrowed money.”

Wharton marketing professor Stephen Hoch sees consumers as embracing a new logic. “Until recently, there has been a theme of entitlement that people really latched onto,” he says. It was built on the belief that consumers worked hard and were entitled to splurge on rewards to compensate for the time and energy devoted to making money. Luxury goods marketers promoted the “entitlement” theme heavily, although they have now backed away almost entirely from this pitch.

Consumers who had learned to trade up when times were flush are now learning to trade down, Hoch adds. They realize they were wasting money on higher-priced goods and services when less expensive alternatives were available with little real trade-off in quality or satisfaction. Indeed, many consumers regret what they used to spend; they are finding a new sense of well-being in becoming more discerning shoppers. “There will be more of a premium placed on seeking value,” Hoch says. “People will realize that’s being smart.”

$1,200 Shoes

Erin Armendinger, managing director of Wharton’s Jay H. Baker Retailing Initiative, suggests that people “are definitely changed by what has happened. I don’t think they will go back to spending like they did, at least not anytime soon.” Consumers, she notes, have cut back sharply, not by choice, but because credit card companies and other lenders pulled their support for the consumption binge that fed into the current financial collapse. The halt in credit expansion is a “hard stop” for consumers who have been forced to retrench and reevaluate their attitudes toward spending.

In the future, shoppers will learn to focus on the value of goods and services, she predicts, citing designer shoes as an example of the new consumer economics. Five years ago, shoes with high-end names sold for $300 to $500. Leading into the economic meltdown, shoe-minded shoppers — buoyed by easy credit and a sense of newfound wealth based on elevated stock and real estate values — were paying $800 to $1,200 for shoes.

“Was there a 100% increase in the value proposition? The answer is probably ‘No,'” says Armendinger. “Everybody got caught in a cycle of conspicuous consumption. Everybody had to have the newest, the latest, the best.”

Now, she says, that “crazy mindset” is over and shoppers are only willing to pay for what they absolutely need or items that present extraordinary value. “We are back to simpler times, but the pendulum will settle somewhere in the middle. We are a country that historically has bought more than we need and we will swing back at some point to buying more than we are now.” As for the pre-meltdown “go-go times, we will never go back to that, at least not anytime soon.”

According to consumer consultant Paco Underhill, author of Why We Buy: The Science of Shopping, the psychological reaction to the financial meltdown is segmented somewhat by age and income, although overall the mood of consumers is clearly downbeat. “The level of depression is pervasive. This is a very dark period. I hope it provokes some serious introspection.”

Underhill describes what he says are three consumer segments now, divided not by income levels, but by income security. One group is made up of those who have lost their jobs and are downwardly mobile. For the wife of a Wall Street banker, that could result in the elimination of weekly hair and nail appointments, while a General Motors worker whose benefits have been cut may struggle to pay the mortgage. “For them, this is traumatic and it cuts across economic classes,” says Underhill.

Those in the second group are not at immediate risk of losing their jobs, but they have friends or family who are out of work. These consumers, he says, are cutting back as a cautionary measure. They are still spending, but find a new sense of pride in comparison shopping for the best deals.

A third group is relatively untouched by the downturn. The individuals in this group have paid off their mortgages and, while their investment portfolios may be down sharply, they still have an adequate cushion. Nonetheless this group is also cutting back because engaging in conspicuous consumption seems like bad manners when so many other people are suffering. However, he says, people in this group are still traveling to places where they can be reasonably confident no one they know will see what they are spending.

The changing consumer psychology also cuts across age cohorts, Underhill suggests. “For Generation Y [those born after 1978], the crisis has hit harder than September 11. This is the first financial trauma of their lives, and they have been led to believe that access to capital and spending is limitless. Many of them are just completely over their heads. They have no idea of budgeting.”

It will be interesting to see how this generation responds, Underhill adds, noting that Generation Y could remain in denial for some time, or they could face the crisis with a rich new set of consumer options, such as so-called “disposable fashion” available at Zara and other retailers. In addition, he says, this generation’s parents seem willing to take them back home to regroup if they stumble financially.

For Generation X — those born between 1965 and 1977 — the decline in housing values is the challenge. Those who bought homes around 1995 with a long-term mortgage probably still have equity in their homes. “But if you bought a house in 2005 or traded up, you are in bad shape,” says Underhill. Baby boomers, too, are caught off guard by the collapse in housing values. “They forgot to save, and thought their houses were doing the saving for them.” For this generation, the idea of retirement will be downscaled from a golden period of luxury to a more modest lifestyle similar to that of their working years.

The way to cope psychologically with these changes is with better education and financial literacy, according to Underhill. “It’s important that people know there is no acquisition in life that is transformative — not a lipstick, not an iPhone, not a new Chevy. Nothing changes you into somebody you weren’t before that purchase happened.”

Wharton marketing professor Leonard Lodish says Americans may have a reputation for materialistic values, but are probably not any more inherently consumer-driven than human beings around the world. The French, he notes, coined the term “prestige” while the Japanese, and now the Chinese, have both exhibited explosive levels of post-industrial consumerism.

Marketers, he says, do not ignite consumerism, but respond to the urge which comes from within. “It’s very hard to create an innate need. That comes from the interplay of society and the values and norms of the culture.”

Loading up on Ketchup

Armendinger points to another impact on shopping patterns — having enough space to store all one’s purchases. U.S. shoppers do seem to lead the world in consumerism, in part because they have enough land to build huge homes and storage units to house all their belongings. “In a nutshell, we have too much stuff,” she says. In Europe and emerging economies such as India, the desire to consume is there, but falls short of American-style hoarding. “You don’t see the Costco mentality of stockpiling toilet paper or huge vats of ketchup, simply because [people] physically don’t have the space.”

Carl Steidtmann, chief economist and director of Deloitte Research — Consumer Business, emphasizes that the Great Depression, combined with World War II, amounted to a 15-year period of consumer constraint, first because of the economic contraction and then because of rationing for the war effort. He predicts that the current downturn, which began in December 2007, will start to abate by the end of this year, and is not likely to have as great a long-term impact on consumers as the Great Depression.

He also suggests that the most lasting impact of the current downturn may be on homeowners who are severely stressed by mortgage debt. Going forward, he expects more of a “renter mentality” in the housing market, with less emphasis on homeownership as an investment vehicle. Still, don’t expect to see modern-day nomads piling Pottery Barn furnishings into their SUVs as they abandon their McMansions. “In every recession, there’s the hypothesis that the consumer is chastened and that we will come out living the simple life of monks,” says Steidtmann. “It hasn’t happened yet.”

He recalls a Time magazine cover story that ran in June 2001 as the economy was slowing, titled “The Simple Life: Goodbye to having it all.”The articleread, in part: “After a 10-year bender of gaudy dreams and godless consumerism, Americans are starting to trade down. They want to reduce their attachments to status symbols, fast-track careers and great expectations of Having It All. Upscale is out; downscale is in. Yuppies are an ancient civilization. Flaunting money is considered gauche: If you’ve got it, please keep it to yourself — or give some away!”

Sound familiar?

Wharton marketing professor David Reibstein says the current angst about consumer spending reminds him of the periods of recession in 2001 and 1991. At both extremes of any economic cycle — the highs and the lows — conventional wisdom holds that during the highs, everyone feels the status quo will continue, while during the lows, everyone feels that life as we know it has forever changed. “While we’re in the midst of it, there’s always that concern,” he says. “What’s amazing to me is how resilient we are.”

Reibstein points to the weeks and months following the terror attacks on September 11, 2001, when it seemed no one would ever have the courage to board an aircraft again. By the time the current financial crisis reduced demand, air travel volume had recovered. “It’s going to take a long time for us to get through this because of the severity and depth of this cycle,” says Reibstein, “but once we do, it will be amazing how quickly people do rebound.”

Gradually, he adds, as the recent shocks to the economy are absorbed, people will begin to reinvest and cautiously step up purchases. Confidence will improve even more as job losses stabilize and hiring begins again, he says. “It’s only going to take time.”

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