The New Consumer Paradigm

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It's been called mystery prosperity. The nation's economy is growing at a rate not seen since the 1960s, unemployment and inflation are the lowest in decades, and the stock market is setting records with regularity.

Some economists explain our good fortune by claiming a new economy is at work, one driven by deficit reduction, low interest rates, and technological advances. Others point to things like the Asian contagion and the inevitable limits of the bull market, and wonder how long this can last.

But despite market jitters and Y2K jitters and Alan Greenspan's jitters, at least we can take comfort in knowing that the economy may be more stable than many fear, if only because consumer spending-which accounts for two-thirds of the nation's economic output-has been considerably muted in the past decade.

Talk about unconventional wisdom. How can this be? Hasn't the media been trumpeting America's runaway spending spree?

It's true, consumer spending has been growing, but only at the aggregate level: the population is growing, the number of households is increasing, and the baby-boom generation-the youngest of which is now 35-has entered its peak spending years. But a close look at trends in spending by individual households tells a different story. Despite low unemployment levels and rising wages, the average American household's spending has been cautious, if not downright miserly in the last decade. After plummeting during the early '90s recession, it wasn't until 1997 that spending by individual households finally caught up to the level of 1987, according to latest Consumer Expenditure Survey (CEX), released by the Bureau of Labor Statistics in December. In fact, the average household spent $34,819 in 1997, only 0.9 percent more than the $34,493 of 1987, after adjusting for inflation.

The CEX, taken annually since the 1980s, provides the most comprehensive and detailed data available on spending at the household level. Through in-depth interviews with a large, representative sample of U.S. households, the survey gathers spending data on nearly 1,000 different products and services. Few researchers mine its depths for trends, however, because it's difficult to turn the raw numbers into useful statistics. The insights that can be revealed, however, make it well worth the trouble.

NEW LIFE-CYCLE PATTERN The stellar economic growth of the last few years has only recently restored spending by individual households to 1987 levels. Many industries have not caught up, however, particularly those selling discretionary goods and services. The average household spent 13 percent less on food away from home in 1997 than in 1987, after adjusting for inflation. It spent 25 percent less on major appliances; 24 percent less on alcoholic beverages; 18 percent less on newspapers, books, and magazines; and 15 percent less on clothing (see Table 1).

The most important predictor of spending is life-cycle stage. Typically, households headed by twentysomethings spend less than average on most products and services because their households are small and their incomes are low. Spending maxes out in middle age, as family size increases and incomes peak, then falls again in older age as household size and income decline.

These stages, combined with the baby booms and busts of past decades, have made consumer marketing a complex endeavor. Add in a fundamental change in the life-cycle pattern of spending, and marketers are discovering that doing business today is a lot like building a house in an earthquake zone.

Two big quakes in spending patterns have reshaped consumer markets in the past ten years. One is the dramatic decline in spending by householders aged 35 to 44. This downturn is of paramount importance to businesses, because the age group accounts for the largest share of American households-23 percent-and, consequently, the largest share of most consumer markets. Ten years ago, this group spent 29 percent more than the average household on goods and services. Today, its spending is just 16 percent above average. Between 1987 and 1997, householders aged 35 to 44 cut their spending 9 percent, after adjusting for inflation (see Table 2).

Their spending once matched that of those aged 45 to 54, but the recession changed all that, and the impact on retailers and manufacturers has been significant. While the number of households headed by 35-to-44-year-olds increased 31 percent from 1987 to 1997, their aggregate spending rose only 19 percent. By contrast, during the same period, the number of households headed by 45-to-54-year-olds rose 44 percent, and their aggregate spending rose an even faster 46 percent. The shift has spelled trouble for toy companies, turmoil among fast-food retailers, and closings and consolidations in the shopping center industry.

What accounted for the younger group's spending decline? Economic insecurity. In this life-cycle stage, people tend to have growing families and huge debts. But the recession of the early 1990s-and falling incomes-forced 35-to-44-year-old householders to cut their discretionary spending in order to make ends meet. They have yet to loosen their grip, leaving 45-to-54-year-olds to uphold the "big spender" title alone.

Older Americans account for the second quake in life-cycle spending patterns. Between 1987 and 1997, spending by the 65-plus set rose faster than in any other age group, fueled by a more educated and affluent generation entering senior citizenhood. Thus, older Americans' spending is rising to approach the average, and the trend will only intensify as the hyper-educated boomers hit their sixties in 2006.

Many businesses still haven't noticed the aging consumer markets. Some are ignoring it entirely. "I'd like to predict that [retailers] are going to come to their senses," says Candace Corlett, partner of WSL Strategic Retail, a New York City-based marketing consulting firm. "Older consumers are spending money, but they're spending it on the industries that have been courting them," Corlett says. Here's a look at some of the winners and losers as the new consumer paradigm takes hold.

THE CASUAL CONSEQUENCE Between 1987 and 1997, the average American household cut its spending on apparel 15 percent, after adjusting for inflation. Spending on women's clothes fell even more, down 20 percent. The biggest cut was made by householders aged 35 to 54. The average household in this age group spent one-third less on women's clothes in 1997 than it did in 1987 (see Table 3).

Ouch! No wonder so many clothing retailers are wondering where their customers went. The growing popularity of khakis and polo shirts-less expensive than business suits-explains part of the decline. "There are a lot more wearing occasions for casual apparel due to a lot of companies going casual in the workplace," explains Cindy Palumbo, a Levi Strauss & Co. spokesperson. A 1997 survey commissioned by Levi Strauss found that 53 percent of U.S. workers now dress casually every day of the week, not just on Fridays.

But more important is the clothing industry's failure to create products that appeal to middle-aged women. The biggest spenders on women's clothes are householders aged 45 to 54, followed by those aged 55 to 64. Yet most clothing is designed and marketed to teens and young adults. With so little to choose from, women aged 35 and older are spending their money elsewhere.

One forward-thinking company that has captured the attention of older women is DM Management in Hingham, Massachusetts, a catalog retailer that targets a neglected category: affluent women over 35 (see "New Look, Better Numbers," October 1998). Sales through its J.Jill and Nicole Summers catalogs have grown rapidly, up more than 61 percent in 1998. Why? Maybe it's because the biggest spenders have nowhere else to shop.

WE JUST WANT TO HAVE FUN The entertainment industry is booming, and no wonder. Each year since 1987, Americans have devoted more of their budget to entertainment. In 1997, the average household spent $1,813 entirely discretionary dollars on good times, up from $1,686 in 1987, after adjusting for inflation-an 8 percent jump. Behind this boom is an increasingly affluent population and the growing enthusiasm of older Americans for having fun (see table 4).

As in almost every other category, the pattern of entertainment spending has shifted markedly. Whereas householders aged 35 to 44 once were the biggest spenders on entertainment, that role has been overtaken-again-by householders aged 45 to 54. Between 1987 and 1997, the average household headed by a 35-to-44-year-old cut its entertainment spending 10 percent. Meanwhile spending by householders aged 45 to 54 surged 16 percent; by 1997, they were spending 33 percent more on entertainment than the average, pushing 35-to-44-year-olds into second place. Rising to third place were householders aged 55 to 64, displacing the 25-to-34 age group.

But it's the senior citizens who have become America's true party animals. The average household headed by a 65-to-74-year-old spends more on entertainment than does the average household headed by someone under age 25. Even the very oldest householders are in on this revolution: Those aged 75-plus spent 98 percent more on entertainment in 1997 than in 1987, the biggest increase of any age group.

The bottom line: Americans aged 55 and older account for a larger share of spending on entertainment than those under age 35. Despite this fact, the entertainment industry has done little to serve fun-loving older Americans-with some exceptions. Elderhostel is booming, precisely because it targets older consumers. But many other businesses have risked bankruptcy rather than change their mind-set. The shopping center industry is a prime example, obsessively pursuing teens and young adults when they could reinvent themselves as entertainment venues for older consumers. Mall visits fell from 2.62 to 1.97 per person per month between 1994 and 1997, according to Maritz Marketing Research polls. "What could possibly lure someone who is 49 or 59 years old?" asks retail consultant Corlett. "If anything, they are repelled by congested aisles and merchandise that is not appropriate."

THE STOMACH WARS Americans are spending less on food than they once did, and that's a problem for the restaurant industry. Between 1987 and 1997, spending by the average household on food at home fell 3 percent, adjusting for inflation. Spending on food away from home fell a much larger 13 percent. When Americans cut their discretionary spending in the early 1990s, restaurants were hit hard, as people turned to less-expensive take-out food. "Consumers opt for a take-out dinner at home a whopping 61 percent more often than they did 10 years ago, whereas they choose to eat dinner in a restaurant 4 percent less often," reports Restaurants USA, the trade magazine of the National Restaurant Association.

Younger householders have cut their food spending the most. In 1987, the best customers in the food-away-from-home category were householders aged 35 to 44, but the recession took away their appetites. From '87 to '97, they cut their restaurant outlays by an enormous 23 percent, ranking them second to 45-to-54-year olds in restaurant spending. Not only that, the average household headed by a 55-to-64-year-old now spends more on food away from home than those headed by 25-to-34-year-olds, despite the fact that older households are smaller. Adding insult to injury, householders aged 65 to 74 spent considerably more on food away from home in 1997 than householders under age 25. Good-bye Planet Hollywood, hello early-bird special (see table 5). (Note to marketers: aging boomers will want early-bird specials at Planet Hollywood!)

Restaurants will have a difficult time recapturing those lost customers. "The low end of the industry is in for big trouble," says Art Siemering, editor and publisher of "Trend/Wire," a weekly newsletter for food marketers. "It's falling behind because so many supermarket chains have made an effort to supplement their sales with home meal replacements."

Whether they are ready-to-eat or ready-to-heat, home meal replacements are changing the way supermarkets do business. Chefs and nutritionists now create signature menu items that shoppers can buy on the fly-everything from ethnic dishes to all-American comfort foods-and separate check-out counters speed customers on their way. In the battle for share-of-stomach, "supermarkets are winning," says Siemering. In the future, he predicts, restaurant dining "will be more of an occasion."

UPWARD SPIRAL HEALTH CARE COSTS No one escaped the rising costs of medical care in the past decade: the average household spent $1,841 out-of-pocket on health care costs in 1997 -a 15 percent increase since 1987, adjusting for inflation. Nearly half that amount was for insurance. But since spending on insurance by the average household grew more than 40 percent across all age groups, the spending pattern did not change significantly. Householders 65 and older spent the most out-of-pocket-52 percent to 58 percent more than the average. The youngest householders spent the least (see table 6).

Not surprisingly, health care consumes a sizable share of older householders' budgets. People aged 65 to 74 devote 10 percent of their annual spending to out-of-pocket health care costs. Those aged 75 or older shell out even more-14 percent of spending overall, or $2,799 in 1997. Despite Medicare coverage, 53 percent of seniors' health care dollars go to insurance bills. Out-of-pocket Medicare costs, plus the supplemental insurance purchased by many, boosts their spending on health insurance far above that of any other age group.

These facts are of utmost importance to today's middle-aged adults. Proposals to raise the age of Medicare eligibility could mean boomers will have to devote an even larger share of their retirement income to medical costs. Few boomers are aware of the enormous burden health care costs place on older householders. Their awareness-and their political involvement-is likely to grow as they approach retirement age.

STILL LIVING WITH 'EARLY MARRIED' Perhaps nothing exemplifies the battle for discretionary dollars better than the war between the furniture and computer industries. As spending on computers has surged, spending on furniture has fallen.

By all accounts, these should be golden years for the furniture industry. The economy is up, homeownership is at a record high, and the baby boomers are in their peak furniture-buying years. But the average household spent 13 percent less on furniture in 1997 than in 1987. And householders aged 35 to 44, traditionally the biggest hearth-and-home spenders, cut their furniture budgets by a stunning 34 percent. By 1997, householders aged 45 to 54 were the biggest furniture buyers, despite the fact that they, too, were spending 8 percent less than a decade ago (see table 7).

Forget the new sofa: householders want a computer and Web access. In 1997, the average household spent $211 on computer hardware, software, and online services for nonbusiness use. While that may not sound like much, it's an average and includes those who spent something and those who spent nothing. More impressive: if you rank all the products and services people buy for their homes, computers are in fourth place. The only items that account for a greater share of the household operations budget are telephone equipment and services (average, $909); furniture ($387); and day care ($232). The average household spends more on computer technology than on major appliances, lawn and gardening, or housewares.

The biggest computer spenders are aged 45 to 54, and they spent 61 percent more than the average household in 1997. Second are aged 35 to 44. Seniors aged 55 to 64 are third, spending more on computers than householders aged 25 to 34 (see table 8).

With computer spending surging, other discretionary categories have suffered-and a reversal is unlikely as the Internet's popularity grows.

THE NEW ADVENTURERS Americans spend a lot on travel. In 1997, the average household spent $1,259 on travel-related transportation, food and alcohol, lodging, and entertainment.

The market has long been dominated by older Americans, and for good reason: it's one of the few industries that has courted them. "They saw the opportunity," says WSL's Candace Corlett. "They looked at who had discretionary income and time. The industry has boomed ever since."

In 1997, the biggest travelers were householders aged 45 to 54, 55 to 64, and 65 to 74-in that order. All other age groups spend less than average on travel. Householders aged 55 to 64 devote the largest share of their spending money to travel, nearly 5 percent. In fact, this age group spends more on travel ($1,706 in 1997, on average) than it does on clothes ($1,656), and almost as much as it spends on furniture, appliances, floor coverings, bed sheets, and bathroom linens combined ($1,728) (see table 9).

Thanks to the aging boomers, the travel industry is likely to experience years of surging growth. When today's workers, regardless of age, are asked what activity they most look forward to when they retire, travel is mentioned by the largest share-32 percent, according to a Gallup survey. When asked whether there is something workers are waiting to do until they retire, once again travel is the hands-down winner-cited by 45 percent of respondents.

The news couldn't be better for the travel industry, and it couldn't be worse for other industries that will lose out to wanderlust. Before the losses mount, businesses should follow the money, targeting the growing numbers of affluent, sophisticated, older consumers.

Retail consultant Corlett is optimistic. As boomers inflate the ranks of older consumers, she says, businesses may finally begin to get it. "Boomers are actually going to convince us that youth is something to be endured while you wait for your forties, fifties, and sixties."

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