Consumers Plan Further Spending Cuts as the Economy Worsens, Finds New Booz & Company Survey

Study sees less spending outside the home, reduced driving and altered shopping patterns; few changes so far in spending on personal image products and services

NEW YORK, October 16, 2008 – U.S. consumers have cut back spending significantly over the past six months, according to a new survey on consumer spending from Booz & Company. More than one third of consumers have made substantial cutbacks in frequent purchases, such as dining out, driving and shopping for everyday goods. In addition consumers plan to continue tightening their household budgets even further if the economy worsens, cutting back on a range of products and services and durable goods, from electronics purchases to gym memberships to children’s toys. While the survey found that consumers will reverse many of these cost-saving measures as finances improve, some changes in spending behavior appear to be long-lasting.

Booz & Company surveyed nearly a thousand consumers, distributed across income and age ranges largely representative of U.S. households, in late September. The objective of the survey was to cover changes in consumer behavior in three areas: changes that they have made over the past six months; additional changes they will make as the economy continues to falter (a reality now given recent economic developments); and changes they will undo, once the economy recovers in the future. The study examined the specific actions these consumers are altering across a dozen broad consumer categories such as food and drink, travel, entertainment and housing.

“Increasingly, consumers are spending less and stretching their dollars further. And counter to some beliefs – these changes are being made broadly across income segments as most households are impacted by either real estate and equity values, ability to access credit, job security and rising input prices” says Paul Leinwand, Booz & Company Partner, who noted that 47% of those polled have seen their savings decrease over the six month period studied, while 41% have seen their levels of debt increase. “Consumers are learning new spending behaviors, and in some cases these more prudent choices will become long-term habits.”

Key findings of the report show:

Households have cut back first on a set of frequent expenditures that are relatively easy to alter – out of home events, shopping and driving – even though they highly value many of these activities.

1. Consumers are reducing “away from home” spending, primarily by changing their dining habits.

  • Of those polled, 43% of respondents are eating out less, 39% are choosing less expensive restaurants, and 35% are packing their own lunch for work, compared to six months ago. Consumers are also spending less on vacations, hobbies, and entertainment. About 28% of respondents are attending more free activities and 26% have cut back on attending concerts, plays, and shows. Over 28% of respondents have reduced the number of vacations they take, and an equal amount have taken less expensive, closer to home vacations.
  • Consumers are increasing “at home” occasions. Across all demographic groups, people are spending more time at home, with a 27% increase in home entertaining. In addition, 27% of respondents are watching more TV, and 25% spending more time on the Internet.

"In the current crisis, consumer have spent less time away from home – fewer vacations, less eating out, more watching TV – and also have switched to lower cost retailers and reduced their driving mileage,” said Leslie Moeller, Booz & Company Partner. “If the economy continues to unwind, these trends will continue and even accelerate the amount of time consumers spend at home.

2. People are shopping less and changing where they shop.

  • Thirty-eight percent more consumers are buying sale items, 32% are buying more store label groceries, and 32% are visiting less expensive stores. As they shift to more at home activities, many people have looked for ways to reduce the “cost of serving” these occasions, such as using coupons (32%), switching to less expensive brands at the grocery store (32%), and making fewer impulse purchases at the register (31%).
  • While consumers seem willing to accept store brands for groceries, they are sticking with brand names for personal care. Approximately a third of consumers have switched to some store brand groceries, but only 7% of consumers have switched to store branded personal care products such as toothpaste and shampoo.
  • Rising fuel prices have led more than a third of consumers surveyed to reduce the amount they drive.
  • Of those polled, 35% now shop closer to home, and 33% have cut down on non-work driving. Reduced driving time is also related to the changes in shopping behavior.
  • Despite concerns over high gas prices, most consumers haven’t moved to find alternate transportation. Only 8.3% more consumers are taking public transportation than six months ago, and only 7.3% more are carpooling to work.

Additional Study Findings

Despite cutting back in other areas, many people are still spending on items related to personal image or indulgences, such as beauty care and new clothing. Only 6% of consumers said they have moved away from their choice of beauty product brands to cheaper versions or reduced the frequency of use. A similarly low number said they have cut back on personal care such as massages, facials, and nail treatments.

Fifteen percent buy more clothing on sale, 14% have postponed clothing purchases, and 13% say they have switched to buying basics at Wal-Mart and Target. One-fifth of respondents said they visited coffee chains less frequently. Interestingly, although 22% are substituting water for soda, less than 10% said they had switched to cheaper brands of beer or alcohol. Instead, consumers are bringing drinking occasions into the home, rather than a bar or restaurant.

“Even in a tough economic environment, consumers will try hard to hold on to a few affordable luxuries and indulgences that they cherish,” said K. B. Shriram, Booz & Company Principal. “Thus far, consumers have made relatively smaller cuts in spending on personal image items and small indulgences – you see this clearly in alcohol purchases, where few consumers have traded down to cheaper brands. While these categories will see reductions in a worsening economic climate, they will continue to be more resilient than most other categories.”

Deferring the purchase of durable goods has just begun, and has been most pronounced in automobiles thus far. Twenty-two percent of the survey respondents reported that they are delaying the purchase of a new car or motor vehicle, and 15% are trading down to a less expensive vehicle.

Major structural changes such as housing are slower to occur, but the cumulative impact will be large. A small but significant group of consumers – more than 8% of the respondents – have already moved to a less expensive neighborhood or city, moved to a smaller home or moved closer to work over the past six months. An additional 4% would make such a change if their financial situation declined.

Certain other areas are highly resistant to cutbacks. Of those polled, only 1.6% cancelled health care insurance, and less than 1% moved their children from private to public school.

If the economy worsens—and two-thirds of those polled believed it would remain the same or deteriorate in six months—consumers said they will make more aggressive changes in their behavior, beginning with even deeper cuts in dining out and spending more time at home.

Assuming a 10% decrease in disposable income, 62% of respondents reported that they would make significant cuts beyond what they have made so far in eating outside the home less and in eating at less expensive restaurants—the highest numbers reported. People also said they would either continue or start to reduce visits to coffee shops (35%) and bars (32%), and cut back on concerts, plays and shows (46%). Instead, they will spend more time watching TV (39%) or on the Internet (36%).

Personal image and indulgence related items will be hit, with 24% respondents stating that they will defer purchases of new clothing (24%) and switch to cheaper brands of alcohol (22%). Also, 7.2% of the population has already cut their charity contributions and another 11.5% said they would make additional cuts.

When the economy improves, consumers will increase their discretionary spending, beginning with dining out, vacations and non-work driving. The action that most consumers would bring back is eating out (28%), followed by taking vacations (14%) and resuming non-work driving (14%). Over 10% would also stop trading down on restaurant choices. In addition, consumers would make previously-delayed furniture and electronics purchases in an improving economy.

However, they expect to largely continue their frugal shopping behaviors for a while. Survey respondents indicate they will generally continue many of their current choices, though this may be impacted by a sense of responsible spending, given the current environment. How much of this will stick permanently is unknown, but consumers reported that they are much more likely to continue some activities that they may learn to value, such as attending more free activities and cut back on concerts, plays and shows. Consumers also reported that they will permanently adopt other changes in shopping patterns, including fewer shopping trips, shopping closer to home, buying more store-label groceries and using coupons.

Methodology

The survey polled nearly 1,000 households distributed across representative income and age demographics. The study also looked at employment status and whether or not there were children in the household. Those polled were responsible for making financial decisions.

Booz & Company sought to comprehensively understand how consumers alter their behavior across major spending categories in response to economic conditions:

  • Changes that they have already made
  • Changes they would make if the economic environment continued to worsen
  • Behaviors consumers would quickly reverse if conditions improved.

Overall, 120 specific actions were covered within a dozen broad spending categories.

Download "Consumer Spending in the Economic Downturn."