Hey, you. Yes, you—the one shoving your wallet back into your pocket. Are you aware that you've been making retailers very uncomfortable?
A façade of calm may be returning to the consumer landscape as a thrashing recession finally subsides. But behind the cheerful window displays are deeply worried retail executives who fear that shopping may never be the same again. Procter & Gamble, for instance, has begun a limited rollout of Tide Basic, a discounted version of its marquee laundry detergent. The move violates a core principle of traditional marketing: Never undercut your own products. But P&G fears it may lose customers altogether if it doesn't offer cheaper alternatives. That reflects a compression of the entire retail taxonomy, as upscale merchants like Saks and Nordstrom slash prices and offer cheaper goods, mainstream stores like Macy's and JCPenney lose customers to discounters, and millions of consumers seek used goods instead of new ones—or simply go without. The one unambiguous bright spot: dollar stores.
It's no surprise that consumers cut back when times are tough. But the typical pattern during recessions is that people reduce spending, hunker down, then resume their former lifestyles once the economy revives. That's not happening in the aftermath of the Great Recession. Despite statistical upticks here and there, Americans are in a gloomy mood, with waning confidence in the job market and in their nation's ability to regain its former vitality. Polls by Gallup show that about half of Americans have reduced their spending, and one third say that they plan to cut back permanently. If that holds, it could mark a consumer revolution, since spending changes of just a few percentage points can make the difference between prosperity and malaise. "We haven't seen this before," says Dennis Jacobe, chief economist at Gallup. "It's the only time this has happened since the Depression. We've had a big shock. I think this will stick."
America's consumer-industrial complex has an arsenal of tools for prying money out of consumers. The problem is, they're based on a premise that's starting to look dated: that Americans define success based on the quantity and quality of stuff they possess. One of the most worrisome trends marketers see is a reduction in spending by consumers who don't necessarily have to cut back.
Joe and Deb Pasquale, for example, are wealthy by most people's standards. The childless, two-income couple lives in a 6,500-square-foot home with five bathrooms and a walnut library outside of Nashville. Yet over the past year, they've stopped eating at restaurants, dialed back their cellphone and cable TV service, and replaced their Infiniti SUV with a used Dodge. They sell unused stuff on eBay for a few extra bucks, and Joe, a music producer with strong technical skills, earns more spare cash by hiring himself out to neighbors who need help installing TV equipment or computers.
The Pasquales don't need to eliminate small luxuries or work odd jobs. But like many Americans, they're spooked by the turbulent economy and determined not to get blindsided by ugly surprises. Deb lost her job at an advertising agency in 2008, and although she found another job three months later, she took a pay cut that reduced the family's household income by 30 percent. The disruption made their jobs, home, and lifestyle seem suddenly fragile. "We don't have the problems a lot of people have," says Joe Pasquale, "but we want to keep our home. So we've cut out other stuff. We can do without opulence."
[See a list of retail winners and losers.]
The bumper sticker for this trend is the "new frugality." But that's an oversimplification that suggests the once indomitable American consumer is retreating, emasculated and broke, into a dimly lit cave. Not quite. True, Americans are saving more and spending less as they pay down painful debt and make do without the easy credit that fueled a 25-year spending binge. Despite widespread anxiety, however, Americans are still instinctively optimistic. They're finding more satisfaction in less stuff, relying more on themselves, and breaking lavish consumption habits that were probably never sustainable. "Consumers are not going to give up on their aspirations to a better life," according to a recent study from the Futures Company, a market-research firm. "They will just rechannel these ambitions to fit the context of the marketplace."
The biggest change afoot may be the way we define prosperity. After a decade-long run-up in homeownership—a longtime benchmark of middle-class success—more people are renting, suggesting that the "ownership society" is unwinding (or never really existed). The homeownership rate peaked in 2005, when about 70 percent of households were occupied by owners. That could sink to the low-60s within a decade—with big implications for overall spending patterns. Housing itself represents about 15 percent of the economy, and the health of the sector affects sales of appliances, furniture, pickup trucks driven by contractors, and many other things. And homes remain the biggest source of wealth for many Americans, so their decline in value implies a long-term deflation of the national psyche: Once the housing bust has finally run its course, the typical home's value could be 40 percent lower than its peak a couple of years ago. For a long time, many Americans will feel, and actually be, less wealthy.
A make-do mentality seems to be extending to other purchases, big and small. Sales of most big-ticket items are down, for example, but the Aaron's rent-to-own furniture chain has been thriving. New-car sales have plunged, but the demand for used cars has surged, driving up their prices. Small changes may be even more likely to last. About 18 percent of consumers have switched from name brands to store brands over the past two years, according to the consulting firm McKinsey. Many of those shoppers found the cheaper products to be just fine and see no need to return to the costlier versions.
Shrewd shopping may be necessary for many consumers on reduced budgets, but it's also becoming mainstream—perhaps even fashionable. Discounters like Wal-Mart and Costco already are thriving, and consumers seem poised to further reward merchants that make them feel savvy, rather than shabby, for economizing. The Futures Company predicts that consumers will punish companies that use slick come-ons or gamesmanship to hawk their wares, while flocking to "risk-free shopping zones" that don't bombard them with enticements meant to swell the shopping bag. "Smaller things now make the bigger statement," says the firm's recent study. "Smaller portions, smaller houses, smaller cars."
Without a doubt, many people are cutting back out of sheer desperation and are finding little redemption in the process. But others, not as close to the edge, are finding that concessions are less grueling than they anticipated, and sometimes even rewarding. "I shop in my closet when the urge hits me to buy something new," says Paige Hodges of Los Angeles, who lost her job as an executive assistant at a real estate developer last July. "I always find a little treasure that I forgot I had."
The surprise benefits of materialistic housecleaning suggest that future spenders may take satisfaction from wasting less and becoming more independent. The Futures Company predicts that consumers will do more household chores and home repairs themselves, even if they can afford to hire help—because they'll relish the self-sufficiency: "Getting things done resourcefully could be a windfall for consumer confidence and optimism. When people believe that they can influence and control events, optimism flourishes," the firm says.
Americans also are rethinking technology, with many deciding they don't need fancy new features with dubious usefulness. That, too, could change some long-held tenets of consumer marketing. Technology typically advances a lot faster than the people who use it, which puts a burden on marketers to convince shoppers that they need something that they didn't even know existed. With the right product—an iPhone, say, or a BlackBerry—that strategy has worked beautifully. But as consumers simplify their lives, they're asking whether they really need a cellphone that does 199 other things. "When I could afford it, I always felt pressured to buy the latest software and gadgets," says Kathryn Husby of Plantation, Fla. When job and health issues curtailed the family income, she and her husband cut back to bare necessities. That meant she didn't have to learn a new set of buttons or icons or menu options every year; she just kept pressing the same familiar buttons on the old model. "I'm happier than I've been for many years," she says. "I feel like I'm in charge of my life instead of multinational corporations telling me what to consume."
A little belt-tightening can be spiritually healthy as well, and that may make cutbacks easier. When Russ and Deborah Merchant lost their home to foreclosure in 2007, friends rallied to their aid and helped them move into a smaller rental. As they cleared out their closets and downsized, they were astonished to discover hundreds of items they had never used and didn't need. They stopped most shopping, made the Goodwill store the first stop when they did need something, and for a year gave away more stuff than they purchased. Meanwhile, they got smarter about managing money and solving problems. Russ started a real estate investing company on the side, and he recently quit a safe job with the state to work full-time at his start-up. "We keep being amazed at how having less stuff, with no deprivation, actually gives us better quality of life," says Deborah Merchant. "We've gained emotional and spiritual maturity." If only they could sell that at the mall.