Consumer Spending in the Economic Downturn

U.S. consumers have cut back spending significantly over the past six months, according to a new survey on consumer spending from Strategy&. 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.

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Leading Research

Paul Leinwand Leslie H. Moeller K. B. Shriram

Consumer Spending in the Economic Downturn
The wide ranging impact on consumer behavior

Results from September 2008 Consumer Spending Behavior Study conducted by Booz & Company
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Executive Summary
Study Context
ƒ The unprecedented confluence of three major economic factors—a dramatic rise in oil prices, a significant deterioration of housing values, and a credit crunch—is affecting the overall economy and significantly changing consumer behavior ƒ To understand how consumer behavior is being altered in the current economic environment, Booz & Company surveyed nearly 1,000 U.S. households ƒ The survey covered changes in consumer behavior in three areas: – Changes that consumers 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) – Changes they will reverse once the economy recovers ƒ The vast majority of consumers have already made substantial cuts in their spending—and expect to make deeper cuts given their gloomy outlook on the economy ƒ Although there are some differences in how different income and age groups have approached spending cuts, most consumers are making similar trade-offs across major spending areas. In addition, as expected, lower income groups are making deeper cuts by more aggressively cutting back on spending and driving and shopping more frugally ƒ The similarity in cost-reduction patterns is not surprising given the fact that the vast majority of the population (except the top few percent) have similar spend allocations and are exposed to similar drivers of change: – Depreciating home/property values – Rising mortgage rates and a credit squeeze – Declining value of retirement funds/savings – Increasing prices for gas and food – Job security concerns

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Executive Summary
Summary Findings
ƒ In approaching cost-cutting, households have focused first on a set of high-expenditure, less structural areas— staying at home more, shopping frugally, and driving less—even though they value many of these activities highly ƒ Deferring the purchase of durables has just begun and has been most pronounced in automobiles thus far—more than 20% of consumers have deferred automobile purchases, while some 15% have traded down to cheaper or more fuel-efficient vehicles ƒ Looking forward, consumers are reporting that they plan to make incremental saving decisions in two areas: – Making deeper cuts in the three areas listed above – Beginning to reduce expenditures on personal durables (clothing), indulgences (coffee chains, alcohol), household durables (electronics) and services (salon treatments, house cleaning) ƒ Major structural changes are challenging for consumers to make, given the high transaction costs (and emotional costs) involved—yet remarkably, 12% of the respondents either have or expect to make major changes to where they live, such as moving closer to work or to a smaller home (and in fact, 8% have already done so) ƒ Only a small number of respondents (7%) have significantly cut charitable contributions thus far, although more than10% expect to make additional cuts. The impact of this cost reduction is significant because those contributing the most are making the largest cuts ƒ Despite making changes focused on reducing spend, nearly half the respondents expect their savings to decline and their debt to increase ƒ When the economy recovers, consumers are mixed about returning to their previous spending choices—they will be much quicker to return to purchasing those items they value most highly, while they will most likely consider making some changes permanent – Across the board, consumers do not believe that they will substantially reverse their new, more frugal spending pattern—though at least part of this may be affected by current budgetary concerns – At least one set of spending activities, however, will be faster to come back; this includes spending on restaurants, vacations, entertainment, and driving—though this spending may be focused first on the more affordable forms of these activities (e.g., not returning as quickly to expensive restaurants)
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A large proportion of households have made major changes across the spend themes identified in our study.
Respondents Making Significant Changes
% Respondents Making Significant Change1

Spend More Time at Home, Less Away

34.7% 55.2% 36.7% 20.2% 32.0% 21.5% 19.8% 12.7% 16.0% 25.6% 8.2% 22.8% 7.5% 15.0% 2.7% 3.3% 0.6% 1.1%

Top 3 Areas

Reduce Driving

Frugal Shopping

Alter Personal Transportation Choices

Defer/Cut Personal Durables

This exhibit shows the percent of respondents who have made major changes - i.e., are making significant changes in more than a third of surveyed actions, in each area

Defer/Cut Household Durables Reduce Spend on Personal Care Services and Consumables Change Housing

Changes made, past 6 months Will make changes going forward

Cut Services Used

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1) Percent responding 5 or above on a 7-point scale in more than a third of surveyed actions in each area Source: Booz & Company consumer spending behavior survey

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Although lower income groups have made more aggressive changes in driving and shopping, the broad spending themes are Significant Changes in a Third or More Actions, In Each Area, Over the Past Six Months—Top Four Areas remarkably consistent.
The broad consistency of behavior across income groups is not surprising given that the vast majority of the population (except the top few percent) has similar spend allocations and is exposed to similar drivers of change: • Depreciating home and property values • Rising mortgage rates and a credit squeeze • Declining value of retirement funds/savings • Increasing prices for gas and food • Job security concerns
% Respondents Making Significant Change1

28.2%
Spend More Time at Home, Less Away

36.8% 38.9% 34.5% 34.3% 27.7% 35.8% 38.5% 37.6% 43.3% 15.4% 29.4%

Reduce Driving

Frugal Shopping

34.6% 33.0% 46.3% 19.7% 23.5% 21.2% 16.5% 17.9%

$98,500 and above $61,500 to $98,499 $38,000 to $61,499 $19,000 to$37,999 Less than $18,999

Alter Personal Transportation Choices

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1) Percent responding 5 or above on a 7-point scale in more than a third of surveyed actions in each area Source: Booz & Company consumer spending behavior survey

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Executive Summary
Initial Observations on the Issues ƒ and Implications of Major Trends ƒ
The changes in consumer behavior that we have seen have a wide-ranging set of implications for businesses and public policy. They also raise new opportunities for those that are either well positioned or who reposition themselves to serve consumers’ new needs. Some examples of key issues and implications include: Spending Time at Home – Reductions in eating out have resulted in sharp declines in restaurants’ performance—additional declines are imminent – The resulting increase in time at home creates opportunities related to meal preparation and entertainment Shopping Frugally – Consumers continue to be brand loyal in categories of high personal value (e.g., personal care, liquor), though many are willing to try private label or value brands or more broadly change their retail outlet choices. Moreover, consumers may stick with these choices if satisfied – Longer-term trends toward convenience and premiumization suggest that consumers may eventually reverse many of their new spending choices, even if they don’t currently believe they will (their beliefs may be caused by being in a particularly thrifty mindset) – Retailers and brand owners must work hard to provide value-branded alternatives and solutions that better suit consumers’ new shopping preferences Driving Less – Consumers have clearly stated a desire to return to pre-downturn driving behaviors, especially as they relate to non-work driving—although their ability to do so will in great part depend on oil prices – We fully expect more stickiness around trends toward trading down to less expensive and more fuel-efficient vehicles; we also expect that a pent-up demand driven by deferred vehicle purchased will eventually be unleashed Savings and Debt – Consumers do not appear to have fully “come to grips” with what it would take to sustain a depressed economy—a large proportion of consumers expect their savings to shrink and debt to rise even with the changes made – Limited access to debt and higher interest rates on debt will necessitate additional cuts in other areas. Structural Housing – 12% of respondents indicated that they have taken or expect to take the relatively difficult step of making a major housing move to save money. We believe that depending on the interplay between income, mortgages, and savings, additional consumers may need to reevaluate these choices.
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Study Context and Methodology

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The survey probed consumer behavior change as it has happened, as it will happen, and as it might revert.
ƒ The goal of the study was to understand how consumers have altered their behavior, and how they expect to alter it further, in response to the current economic crisis. ƒ We designed this survey as a comprehensive study of consumer behavior: – Covering a wide range of actions (such as shopping patterns and changes in living arrangements) – Including all major product categories (e.g., food, automobiles, entertainment, durables, and electronics) – Having a large enough sample size to go beyond anecdotal or partial evidence. ƒ This survey was completed in the second half of September 2008. – The recent financial crisis was beginning to escalate. Bear Stearns had just collapsed. – Even at that time, consumers were already expecting a real loss of income and were adjusting their spending behavior and their attitudes; since then, the situation has continued to worsen. – The responses to our study thus represent a reasonable proxy for what will happen in the forthcoming year. ƒ More than two-thirds of the survey respondents believed that the economic outlook six months out would be worse—and expressed a strong desire to take further action.

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We divided responses by timeframe. ƒ We asked consumers to define:

1 2 3

the changes they have already made in the previous six months, when economic conditions were tightening the changes they will make in the next six months and beyond, when economic conditions are likely to tighten further the changes they will undo (or behavior they would revert to) in the more distant future, when economic conditions are expected to improve ƒ In highlighting the results of the study, we focused only on the people who made significant changes – defined as a response of 5 or higher, on a scale of 1 to 7, to questions about the importance of the change to them.

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The survey covered nearly a thousand households distributed across income and representative age demographics.
Income Quintiles
Less than $19K 20% $98,500+ 19% 50–64 $19K to $38K 19% 21% $38K to $61.5K 21% $61.5K to $98.5K

Age Distribution
65+ 12% 24% 18–24 12% 22% 25–34

30% 35–49

Employment Status
Retired 16% Households With Children

Children

35%

65% 84% Nonretired Households Without Children

ƒ We asked consumers about a dozen product and service categories: – Appliances and electronics – Charitable contributions – Clothing – Education – Entertainment – Food and drink (at home) – Food and drink (away from home) – Furniture – Health products and health insurance – Housing – Personal care – Pensions, retirement funds, insurance ƒ We covered more than 120 specific actions, including: – “eating at less expensive restaurants” – “moving to a less expensive city” – “switching to cheaper brands of beer” ƒ The mix of survey respondents is largely consistent with U.S. census data

The survey covered ~1,100 respondents who were primary decision makers. Some of the respondents were rejected based on data integrity checks, resulting in an analysis base of 995 households.
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1
Changes consumers have already made

Changes Consumers Have Already Made

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1 Changes consumers have already made

Consumers have made the most changes so far in high-expenditure, less structural consumables: leisure (including dining out), shopping, and driving.

Top 20 Changes Consumers Have Made
% Respondents Making Significant Change1

Eat outside the home less

43.2% 39.3% 35.4% 34.8% 32.4% 29.7% 28.1% 28.1% 28.0% 27.0% 38.0% 32.4% 32.1% 31.8% 30.9% 28.3% 36.5% 35.5% 34.8% 33.0% 33.0% 1.7%

While choosing the actions to give up, consumers seem to have favored “ease” over how much they value the actions—which is apparent in their decision to mostly give up the “highexpenditure, less structural” actions that are also the first ones they will undo if the economy recovers (this trend is discussed in later section)

Eat at less expensive restaurants Eat at fast food restaurants less frequently Pack lunch for work Eat more leftovers Order less food when you go out to eat Reduce number of vacations Take cheaper vacations (closer to home) Attend more “free” activities (e.g., hiking, beach, museums) Entertain friends at home instead of going out Buy sale items
Buy more store-label groceries (not buying top labels)

Spend more time at home, less away

Frugal shopping

Use coupons Shop at less expensive stores Fewer impulse purchases at register Shift away from more expensive to less expensive versions Drive less overall

Reducing driving For comparison

Take fewer shopping trips Shop at stores closer to home Cut down on nonwork driving Top 20 of all changes made (average) Bottom 20 of all changes made (average)

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1) Percent responding 5 or above on a 7-point scale Source: Booz & Company consumer spending behavior survey

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1 Changes consumers have already made

But we’ve seen only a few consumers make more substantial changes related to other areas—durables, services, and structural transportation and housing.
Top Three Changes in Each Area
% Respondents Making Significant Change1

Top Three Changes in Each Area
% Respondents Making Significant Change1

Defer purchase of a newer vehicle

22.0% 17.0% 15.0% 23.0% 15.0% 14.0% 7.0% 7.0% 7.0%

Alter personal transportation choices

Buy or use a more fuel-efficient car Buy or use a less expensive vehicle Purchase fewer or less expensive toys

Reduce spend on personal care services and consumables

Shop at discount stores Reduce haircuts, coloring Purchase more store-brand personal care products (toothpaste, shampoo, etc.) Move to a less expensive neighborhood in a comparably sized home Move to a less expensive city Move closer to work Reduce utilities (water, gas, electricity)

8.0% 7.0% 7.0% 3.0% 3.0% 3.0% 13.0% 5.0% 3.0%

Defer/cut personal durables

Only buy apparel items that are on sale Defer purchases of new clothing Delay purchasing new appliances

Change housing

Defer/cut household durables

Delay purchasing new electronics such as computer, TV, or stereo Delay purchasing new furniture, floor coverings, and window treatments Top 20 of all changes made (average) Bottom 20 of all changes made (average)
1.7%

Cut services used

Delay nonurgent medical procedures Reduce “options” on health care plan to lower costs

For comparison

33.0%

For comparison

Top 20 of all changes made (average) Bottom 20 of all changes made (average)
1.7%

33.0%

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1) Percent responding 5 or above on a 7-point scale Source: Booz & Company consumer spending behavior survey

2)

Excludes amount and frequency of charitable contributions, savings, and debt

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1 Changes consumers have already made

In these relatively slow-changing areas, we see some harbingers of future behavior.
ƒ Generally, consumers are reporting making fewer changes in more structural areas; that is, in areas where substantial time, effort, and in some cases costs would need to be made in order to change spending patterns – 15% are trading down to a less expensive vehicle – 8% have made some changes in areas related to the home—though in fact this is a relatively high percentage given the type of changes (moving to a less expensive neighborhood or city, moving closer to work, or moving to a smaller home) ƒ A more general trend, however, is the delaying of more substantial purchases – 22% of survey respondents are delaying the purchase of a new car or motor vehicle – Consumers have made relatively fewer changes to their personal durable choices, both deferment (purchasing new clothing) and trading down (purchasing fewer premium apparel brands) – For household durable products (apparel, electronics, furniture, appliances), consumers are deferring purchases rather than “trading down” to what they perceive as less desirable products ƒ Consumers are, however, more varied in their response to services – The top action has been to reduce utilities usage (13%) – The third-biggest action relates to reducing options on healthcare plans, a change made by only 3% of the consumers surveyed

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1 Changes consumers have already made

Some interesting observations.
ƒ We love how we look . . .
– Only about 5% of the consumers surveyed said they have moved away from their choice of beauty product brands to cheaper versions or reduced the frequency of use – In addition, a similarly low number said they would reduce their outlay on personal care (e.g., massages, facials, manicures)

ƒ . . . and what we drink
– Less than 10% of consumers said they have switched to a less expensive brand of alcohol. . . – . . . or switched to a cheaper brand of beer – Instead, they are enjoying their drinking occasions “at home”

ƒ A healthier America or simple cost savings?
– Soda and other noncarbonated drinks are being substituted with tap water by ~22% of consumers – In addition, almost 25% of consumers have cut down on treats

ƒ Store brands are avoided (as not very “personal”?)
– Only around 7% of consumers have switched to store-brand personal care products (e.g., toothpaste, shampoo) – This is in stark contrast to the fact that almost 33% of consumers have switched to store-brand groceries

ƒ We stay more “at home” . . .
– Consumers say they have focused more on things they can do “at home,” such as entertaining friends (~27%) – In addition, they are filling their free time by watching more TV (~27%) or spending more time on the Internet (~25%)

ƒ . . . and cut down on outside activities ƒ We worry about fuel costs, but do not alter our travel choices . . . yet
– Interestingly, even though fuel cost is an issue, not many consumers are resorting to carpooling (~7%) or taking public transportation (~8%)
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Changes consumers will make

Changes Consumers Will Make (Under a Continued Negative Economic Outlook)

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2 Changes consumers will make

Additional changes will be driven by those who have made changes and those who will now make changes.
Example: Key to Charts on the Following Pages
Additional changes

Example Explanation
Eat outside the home less
10.8% 32.5% People who have made changes in past 6 months AND will make additional future changes 29.8% People who have NOT made any changes in past 6 months BUT will make additional future changes

ƒ Almost 43% of households have cut back significantly on eating out in the past six months – Of this number, 10.8% will not make substantial additional changes – The remaining 32.5% will make additional cuts as the economy continues to worsen ƒ An additional 20.6% of households that did not substantially reduce eating out in the past six months will now make significant cuts, given the worsening economy

People who have made changes in past 6 months but will NOT make additional future changes

Total number of people who have made changes in the past 6 months 10.8% + 32.5% = 43.3%

Total number of people who will make additional changes in the future—whether they have or have not made changes in the past 6 months 32.5% + 29.8% = 62.3% Total number of people who have either made changes in the past 6 months OR will make changes in the future 10.8% + 32.5% + 29.8% = 73.1 %

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2 Changes consumers will make

Spending cuts to come are expected to be significant—though the sources of those cuts are not equal across categories. Extent of Additional Changes People Will Make in Areas Where They Have Already
Made Changes (Top 20 Changes)
% Respondents Making Significant Change1 Eat outside the home less

10.8% 9.8% 9.5% 7.6% 7.3% 8.7% 8.9% 7.5% 7.6% 20.2% 23.5% 19.9% 20.3% 20.5% 19.8% 17.8% 23.3% 23.6% 22.5% 22.1%

32.5% 29.5% 25.8% 20.4% 20.8% 20.9% 25.8% 20.6% 19.4% 12.2% 14.5% 12.2% 11.5% 11.9% 11.1% 10.6% 13.2% 11.9% 12.3% 10.9% 1.7% 8.6% 20.8% 8.7% 9.3% 9.5% 8.9% 9.7% 9.8% 23.2% 21.4% 20.9% 20.8% 20.7% 20.3% 28.4% 27.9% 27.2% 21.9% 26.1% 24.9% 27.4%

29.8% 28.8% 48.8% 48.7% 48.1% 47.7% 46.7% 44.3%

62.2% 58.3% 53.3%

We’ve seen big changes here already; more dramatic changes are expected related to eating at home, attending more free activities, spending less time away from home, and reducing the cost of meals and entertainment in general.

Eat at less expensive restaurants Eat at fast food restaurants less frequently

Spend more time at home, less away

Attend more “free” activities (e.g., hiking, beach, museums) Take cheaper vacations (e.g., closer to home) Order less food when you go out to eat Pack lunch for work Reduce number of vacations Entertain friends at home instead of going out Eat more leftovers Buy sale items

These habits, already changed by many consumers (up to 30%), are likely to increase less dramatically going forward: shifts in shopping and driving patterns (buying items on sale, using coupons, making fewer trips), along with eating more leftovers.

Use coupons

Frugal shopping

Shop at less expensive stores Buy more store-label groceries (not buying top labels) Fewer impulse purchases at register Shift away from more expensive to less expensive versions

Reducing driving

Drive less overall Take fewer shopping trips Shop at stores closer to home Cut down on nonwork driving

7.1% 20.3% 7.6% 19.5% 6.5% 18.8% 7.1% 18.0% 33.0%

Past 6 months, but NO additional future changes Past 6 months AND additional future changes Not in past 6 months, but additional future changes

For comparison
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Top 20 of all changes made (average) Bottom 20 of all changes made (average)

1) Percent responding 5 or above on a 7-point scale Source: Booz & Company consumer spending behavior survey

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2 Changes consumers will make

In some areas, consumers are planning on making cuts in new categories for the first time as they look for increased savings.
Even people who have already cut back in time spent out of the house (dark blue bars) expect to cut back more; they will be joined by people who have not yet cut back (light blue bars). Extent of Additional Changes People Will Make in Areas That Are Not Part of Top 20 Changes Already Made
% Respondents Making Significant Change1

Cut back on concerts, plays, and shows Reduce spending on hobbies/sport activities Reduce day trips (e.g., amusement parks) Purchase fewer or less expensive toys Spend more time watching TV Spend more time on the Internet Visit coffee chains less frequently Go to bars less often Rent movies and games from video stores more (e.g., Blockbuster, Netflix) Buy cheaper drinks from coffee chains Only buy apparel items that are on sale

7.5% 6.7% 6.5% 5.9% 9.4% 8.9% 5.7% 5.3% 7.9% 4.2% 8.2%

27.3% 27.7% 27.3% 22.1% 21.8% 20.0% 19.9% 16.0% 18.0% 19.3% 17.9%

18.9% 18.1% 17.4% 17.5% 17.6% 16.3% 15.5% 15.6% 13.4% 8.9% 7.1% 39.6% 39.4% 36.3% 35.4% 31.6% 31.4% 28.2%

46.2% 45.8% 44.7%

25.0% 33.0%

For comparison

Top 20 of all changes made (average) Bottom 20 of all changes made (average)
Past 6 months AND additional future changes

1.7%
Not in past 6 months, but additional future changes

Past 6 months, but NO additional future changes
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1) Percent responding 5 or above on a 7-point scale Source: Booz & Company consumer spending behavior survey

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2 Changes consumers will make

Some consumers who have not yet made tough choices now expect to make aggressive cutbacks in durables and a few services; housing and transportation will see minimal further action.
Top Three Changes Across Areas
% Respondents Making Significant Change1

Top Three Changes Across Areas
% Respondents Making Significant Change1

Defer purchase of a newer vehicle

14.0% 10.6% 9.6%

Shop at discount stores

15.5% 12.5% 13.5% 3.4% 3.2% 2.5% 7.8% 3.0% 2.0%

Alter personal transportation choices

Buy or use a more fuel-efficient car Buy or use a less expensive vehicle Purchase fewer or less expensive toys

Reduce spend on personal care services and consumables
36.9% 25.0% 24.2% 21.8% 22.3% 21.6%

When possible buy items in bulk Purchase more store-brand personal care products (toothpaste, shampoo, etc.) Move to a less expensive neighborhood in a comparably sized home Move to a smaller home in a comparable neighborhood Get a roommate(s) if you rent Reduce utilities (water, gas, electricity)

Defer/cut personal durables

Only buy apparel items that are on sale Defer purchases of new clothing Delay purchasing new appliances

Change housing

Defer/cut household durables

Delay purchasing new electronics such as computer, TV, or stereo Delay purchasing new furniture, floor coverings, and window treatments Top 20 of all changes made (average) Bottom 20 of all changes made (average)
1.7%

Cut services used

Delay nonurgent medical procedures Reduce spending on personal insurance

For comparison

33.0%

For comparison

Top 20 of all changes made (average) Bottom 20 of all changes made (average)
Not in past 6 months, but additional future changes 2) Excludes amount and frequency of charitable contributions, savings, and debt
1.7%

33.0%

Past 6 months, but NO additional future changes
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Past 6 months AND additional future changes

1) Percent responding 5 or above on a 7-point scale Source: Booz & Company consumer spending behavior survey

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2 Changes consumers will make

In relatively slow-changing areas (services, durables, housing and transportation), a small but growing number of people expect to change.

ƒ Though the trend is still not widespread, consumers are increasingly planning for changes in more structural areas—housing, automobiles, durables—though these areas are still considered challenging ones for consumers to change. Consumers may revisit this area going forward if they have a need because it offers significant potential savings. – In the past, we have not seen many consumers cut back their durables purchases, but now they expect to do so. – Housing-related actions increase only incrementally; however, these aggregate to a bigger number since nearly 4% of new, unique consumers will make some kind of major structural housing change, making the total impact ~12% (those who have made or will make changes) ƒ Cutbacks in services continue to be modest . . . ƒ . . . but the rate of change is accelerating as more people make significant cuts in services for the first time. These include: – Reducing the number of salon and barber visits – Deferring health and beauty augmentations – Canceling gym memberships – Eliminating therapists

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2 Changes consumers will make

Some interesting observations.
ƒ Climate change and carbon considerations may take a back seat – The number of people expecting to buy a more fuel-efficient car has actually gone down (from 17.3% to 10.3%) since the crisis began. – Only 7.8% of consumers surveyed expect to cut back home use of electricity, heating fuel, and water— down from 13.4% who have already done so. – On the other hand, 8.9% expect to replace appliances with more energy-efficient versions—up from 3.9% who already have. ƒ We expect to switch to less expensive stores for basic goods
– More people will accept (for example) Wal-Mart and Target for their basic needs – ~21% will make the change vs. ~13% who have made the change already – With apparel, and its image-defining nature, the shift is slightly less (~19% vs. ~11%)

ƒ We protect our personal image—but not at any cost
– With a tightening economy, more people are willing to give up on actions that relate to personal image – They will purchase fewer premium clothes (22% vs. ~14%), buy items out of season (~23% vs. ~13%), or buy cheaper brands of beauty products (~12% vs. 6%)

ƒ Will we give up “indulgences”—small luxuries?
– Consumers will buy cheaper brands of beer (~22% vs. ~11%) and alcohol (8% vs. 8% who have already changed), – They will visit coffee chains less frequently (~35% vs. ~21%) and buy cheaper drinks when they are there (~28% vs. 13%) – Interestingly, consumers will not be as aggressive about shifting to drinking more at home (~11% vs. 15%)

ƒ We expect to stay at home even more as the economy worsens . . .
– There is likely to be an aggressive reduction in consumer spending on outdoor activities (~46% vs. ~25%), number of vacations (~48% vs. 28%), going to bars (~32% vs. ~21%), and visiting coffee chains (~35% vs. ~21%) – People will watch more TV (~40% vs. ~27%) and spend more time on the Internet (~36% vs. ~25%)

ƒ . . . while cutting down further on “away from home” occasions
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Changes consumers will undo

Changes Consumers Will Undo (Under a Positive Economic Outlook)

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3 Changes consumers will undo

Consumers generally predict that they will hold changes despite an ability to reverse them ─ though some of this belief may be attributed to a frugal mindset.
Looking forward, we asked consumers which of their new frugal behaviors they would undo when the economy recovers:
How much would they revert to old (more expensive) habits?
Spend more time at home, less away

Extent of Changes People Will Undo in Areas Where They Have % Respondents Making Significant Change Already Made Changes (Top 20 Changes)
Eat outside the home less Eat at less expensive restaurants Eat at fast food restaurants less frequently Pack lunch for work Eat more leftovers Order less food when you go out to eat Reduce number of vacations Take cheaper vacations (e.g., closer to home) Attend more “free” activities (e.g., hiking, beach, museums) Entertain friends at home instead of going out Buy sale items Buy more store-label groceries (not buying top labels)
1 .5% 27.0% 2.7% 38.0% 1 .4% 32.4% 8.0% 32.1 % 0.9% 31 .8% 1 .2% 30.9% 0.7% 3.0% 5.2% 35.5% 1 .4% 34.8% 0.5% 33.0% 1 3.7% 1 .7% 33.0% 28.4% 36.5% 1 0.7% 28.0% 1 .1 % 3.4% 28.1 % 1 4.5% 28.1 % 3.6% 32.4% 29.6% 7.0% 34.7% 1 0.6% 35.3% 28.4% 39.3%

1

43.3%

Frugal shopping

Use coupons Shop at less expensive stores Fewer impulse purchases at register Shift away from more expensive to less expensive versions Drive less overall

People who have made significant changes in the past six months (some proportion of them have made additional changes) People who will undo changes they have made
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Reducing driving For comparison

Take fewer shopping trips Shop at stores closer to home Cut down on nonwork driving Top 20 of all changes made (average) Bottom 20 of all changes made (average)

1) Percent responding 5 or above on a 7-point scale Source: Booz & Company consumer spending behavior survey

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3 Changes consumers will undo

Consumers will revert back more quickly in some areas ─ even in areas that were not big sources of savings.
Extent of Additional Changes People Will Undo in Areas That Are Not Part of Top 20 Changes Already Made 2
% Respondents Making Significant Change1

Defer/cut personal and household durables

Delay purchasing new furniture, floor coverings, and window treatments Delay purchasing new electronics such as computer, TV, or stereo Defer purchases of new clothing Only buy clothes to wear to work Delay purchasing new appliances Reduce personal care (e.g., nails, facials, massages)
3.3%

7.4%
9.6%

7.4%
9.5%

14.0%
6.7%

7.1%
6.2%

7.1% 5.5%
6.2%

Image & personal care

Shop at Target and Wal-Mart for clothes (instead of department stores) Purchase more store-brand personal care products (toothpaste, shampoo, etc.) Reduce spending on hobbies/sport activities

10.8%
5.1%

6.9%
3.8%

24.8%
8.2%

People who have made significant changes in the past six months (some proportion of them have made additional changes) People who will undo changes they have made
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Entertainment & Hobbies

Cut back on concerts, plays, and shows Reduce day trips (e.g., amusement parks)

26.4%
5.3%

23.9%
3.5% 1.7% 33.0%

For comparison

Top 20 of all changes made (average) Bottom 20 of all changes made (average)

1) Percent responding 5 or above on a 7-point scale Source: Booz & Company consumer spending behavior survey

2)

Excludes amount and frequency of charitable contributions

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Impact on Savings, Debt, and Charitable Contributions

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Consumers expect economic conditions to affect their savings and debt.
Changes in Savings
% Respondents
1

Changes in Debt
% Respondents1 A lot Somewhat A lot

Somewhat

Decreases compared to 6 months ago

27.4%

20.1%

47.5%

Increases compared to 6 months ago

29.3%

11.4%

40.7%

Additional Decreases, if economic situation deteriorates

32.6%

19.7%

52.3%

Additional Increases, if economic situation deteriorates

24.2%

11.3%

35.5%

Increases, if economic situation improves

23.5%

25.0%

Decreases if economic situation improves

19.1%

21.5%

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ƒ ƒ

Only 28% of the highest income group have decreased savings (somewhat or a lot) compared to 53% of the lowest income group Almost half of the highest income group will further reduce their savings in a declining economy The lower income group does not expect to see any further reduction in their savings

ƒ ƒ

27% of the highest income group has seen their debt level rise vs. 50% for the lowest income group In a worsening economy, across income groups, a smaller number of people expect their debt level to rise

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1)

1 = Decreases a lot, 2–3 = decreases somewhat, 4 = stays the

same, 5–6 = increases somewhat, 7 = increases a lot

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Consumers expect economic conditions to affect their charitable contributions.
Charity: Dollar Amount Given
% Respondents Making Significant Change
1

Charity: Frequency of Donation
% Respondents Making Significant Change1

7.2%

6.8% Reduce frequency of charitable donations 1.4%

Reduce amount of charitable contributions

11.6%

11.0%

4.3%

Changes made

Changes will make if economic situation deteriorates

Changes will undo if economic situation improves

ƒ ƒ ƒ

ƒ

A greater proportion (14%) of the highest income group will significantly reduce their charitable contributions In addition, 12% of the highest income group will reduce their frequency of donation vs. 6.8% for the overall population As the economy worsens, an even greater proportion of the highest income group will decrease the amount and frequency of their charitable contribution —21% and 21%, respectively This trend may be compounded by the lack of capital gains available for tax offset, which is traditionally a source of charitable giving
1) Percent responding 5 or above on a 7-point scale Source: Booz & Company consumer spending behavior survey

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1)

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For more information please contact

Chicago Paul Leinwand Partner +1.312.578.4573 [email protected] Chicago K.B. Shriram Principal +1.312.578.4611 [email protected]
Additional contributors Jonathan Crawford Senior Associate , San Francisco Laura Leets Associate, McLean Jacob Markman Senior Associate, San Francisco
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Cleveland Leslie H. Moeller Partner +1.216.696.1767 [email protected]

Ignacio Diaz Associate, Chicago Jeffery P Leisure Consultant, San Francisco Amit Misra Senior Associate, Chicago

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The most recent list of our office addresses and telephone numbers can be found on our website, www.booz.com

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Booz & Company is a leading global management consulting firm, helping the world’s top businesses, governments, and organizations. Our founder, Edwin Booz, defined the profession when he established the first management consulting firm in 1914. Today, with more than 3,300 people in 58 offices around the world, we bring foresight and knowledge, deep functional expertise, and a practical approach to building capabilities and delivering real impact. We work closely with our clients to create and deliver essential advantage. For our management magazine strategy+business, visit www.strategy-business.com. Visit www.booz.com to learn more about Booz & Company.

©2008 Booz & Company Inc.

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