Marketers Fear Frugality May Just Be Here to Stay

P&G, Home Depot Fret That Recession Has Forever Altered Spending Patterns

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NEW YORK (AdAge.com) -- Mary Pryor was doing pretty well until January, when she got laid off from her web-project-management job at cable channel Fuse. Now she's replenishing her wardrobe at clothing swaps, eating on $25 a week, living without cable TV and doing her laundry in the bathtub. "My gym membership is gone," she said, "so I'm running around outside and doing jumping jacks in my living room."

With 5.7 million Americans out of work since the recession began in December 2007, according to the Bureau of Labor Statistics, and some 16% of U.S. employees living on reduced pay, according to a recent Hewitt Associates survey, it's no surprise that many people are cinching their belts. What's troubling marketers, however, is the prospect that the consumer psychology has changed during the deepest recession in half a century, and that the tightening will remain when the downturn ends. "I'm going to do my best to not go back to spending what I used to," said Ms. Pryor, 27. "Even with a steady job again, I am going to have a job on the side. I am going to create a savings that is out of control -- so when this happens again I won't be screaming bloody murder."

This new frugality is giving pause not just to retailers such as Home Depot and Whole Foods but to the country's largest advertiser, Procter & Gamble. Discussing declining department store-sales, P&G Chairman A.G. Lafley told an investor conference May 28, "My belief is some of that's gone forever," he said. "And it's gone forever because [the consumer] has changed her pattern of shopping. She'll still go to get advice and counsel, maybe even see new products and new brands at department or specialty stores. But she's replenishing online and she's quite comfortable using our [less expensive] Olay lines. I mean, let's face it, those Olay products test as well or better."

The heavy betting -- and it goes well beyond Cincinnati -- is that America will eventually shake off recession but keep saving and spending more responsibly. We'll borrow only when we must. We'll pay bills and debts immediately. We'll save up before we buy big things. New England Consulting Group reported last week that people buying more store brands now don't have any plans to trade back up, and that recession-induced shopping habits are likely to persist "long after it's gone." All that has left many marketers trying to adapt with strategies such as lowering some prices, offering multiple product lines at varying price points and giving reluctant consumers reasons to buy by tying into causes such as environmentalism.

Not everyone, of course, is buying permanent frugality, especially if the economy eventually gets glamorous again. "Some of it will persist, no doubt," said Eldar Shafir, professor of psychology and public affairs at the Massachusetts Institute of Technology. "But people adjust to context very, very quickly. If the thing they went through is at the level of true trauma, then it will take awhile. But my suspicion is that for the majority of people you're talking about, this has not been traumatic, just worrisome and troublesome."

"Most people who advertisers are talking about are reserving restaurants this weekend," Mr. Shafir said. "They're not in a trauma state."

But many more people these days are preparing for micro-spending, or at least medium spending, to last long after the recession. This time, the thinking goes, is different.

Worse than before
This recession has had a much bigger impact on people's psyches than, say, the 1987 stock-market crash, according to Robert S. McElvaine, chair of the history department at Millsaps College. "I often quote a line from REM's 'Finest Work Song,'" he said. "'What we want and what we need have been confused.' People have done much more in recent months to sort out what they want and what they need. So I think it's going to be much different than 1987."

And even if people resume chasing what they want, they'll have trouble. "Credit is going to be hard to find," Mr. McElvaine said. "People are going to be in so much debt. They were able to do that by using their houses as ATM machines, and now they've pretty much maxed them out even at the old values."

Consumer behavior has changed before and can again, said Neil Howe, founding partner of Life Course Associates and co-author of books including "13th Gen" and "Millennials Rising." "We think there's a significant generational change taking place now particularly," Mr. Howe said. "The new generation coming into rising adulthood, this new millennial generation, is much more oriented to planning, looking ahead and taking a more sober and conventional approach. They're much closer to their parents. That's being accentuated by the recession."

That's not to say everything stops. "We're not expecting everybody to become puritans, wear black clothes and never go out on Saturday night," said Michael A. Bernstein, professor of history and economics at Tulane University. "That ain't us -- and if it happened, the economy would go down the toilet for the rest of our natural lives."

There will be beneficiaries, in fact, as consumers seek a new equilibrium -- and plenty of marketers trying to help them. Home Depot, which cut prices between 5% and 50% on about 1,200 items last fall, said those cuts and the marketing touting them is permanent. "We have always offered customers that value, and we needed to look at better ways to showcase that for the consumer," said Jean Niemi, a spokeswoman for Home Depot. "You'll continue to see that, even if the economy does pick up."

Lasting value
Marketers such as P&G may win on some fronts but not others. It's not clear, for example, how many people who traded down from premium-price Tide will come back once the recession clears. But as Mr. Lafley indicated, the company expects its mass-skin-care brand Olay to keep many of the women who recently traded down from department-store shopping.

Retailers are trying to catch the new current; some are in better positions than others. "All the companies I that I follow say they believe the focus on value will last," said Meredith Adler, analyst at Barclays Capital, who covers companies from Family Dollar Stores to Whole Foods.

For just about everyone with something to sell, however, there's an angle to pursue beyond simple value. "The younger kids are growing up with more of a value sense," said Deborah Wahl-Meyer, the former Chrysler CMO now based at Media Link, a media representation and advisory firm. "It's not just about money and things; it's about meaningful things and relationships. So I think we're going to see a lot more push toward that."

"It's really the next challenge for business," she added. "You look at what's driving innovation now. People are looking for better solutions."

Somewhere between a third and half of consumers expect to stick with various money-saving strategies even after the recession ends, according to big monthly tracking surveys by Retail Forward, the retail-consulting firm. "There already was the coalescing of a trend to think about simplifying lifestyles," said Retail Forward senior VP Mary Beth Whitfield. "It was tied into more environmentally friendly consumption patterns, but they were already thinking about consuming less or becoming more conscious when they did consume."

So you may see a lot more campaigns like the new one from Starbucks defending its prices by arguing that the extra helps pay for fair-trade beans and health care for employees. "It's not what you're buying," one ad proclaims, "it's what you're buying into."

However marketers and agencies do it, they'll play a role in reviving spending, said Mr. Shafir, the MIT professor and new-frugality skeptic. "There are going to be tremendously talented people out there making sure we feel comfortable spending again," he said. "They're going to make it easy and enticing. And that's going to work again. I don't think a couple years' discomfort is going to make people resist or transcend all that."

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Contributing: Jack Neff, Natalie Zmuda

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