Boomers Caught in Squeeze Play

American consumers have no recollection of life in the Great Depression. Not only are most simply too young to remember it, but for the last quarter century they’ve lived without extended economic hardship, becoming ever more acquisitive in a world of instant gratification and easy credit. No one knows how long or severe the current downturn will be.

The circumstances of this recession are unprecedented in the history of modern consumerism: For a generation that has substituted rising home equity and stock prices for personal savings, the current economic meltdown — with the value of the Dow Jones Industrial Index plunging 40 percent from its peak and $4 trillion lost in home equity — has been psychologically wrenching after a quarter century of unquestioned prosperity.

Factor in the loss of confidence in financial institutions and an investing world where even the very rich can be wiped out through Ponzi schemes and you have a group of shell-shocked consumers who are reconsidering long-held spending habits.

Much has been made about the everyday stuff of thrifty consumerism — coupon clipping, fewer restaurant meals, brown-bagging it to work, staying close to home for vacations. But those thumbnail sketches of a contracting economy miss the big picture: The fears among baby boomers, who account for more than half of U.S. spending and who traditionally have grown more affluent with age.

Eric Almquist, a Bain & Co. partner, points to the number of retirement-age individuals who are becoming more conservative with money. “One of the unique things in the Western world now is that you have a huge group of pre-retirement baby boomers, a huge number of people who are asking, ‘Can I live off my savings and social security for the rest of my life?'” observes Almquist. “This creates the potential to switch behaviors. They’ll watch pennies more closely, be more careful with credit, avoid losses and be more risk adverse, preserve the status quo, rather than gain gains.”

Already there are signs of that change. In one of the most dramatic reversals in post-World War II history, Americans — who in recent years have had negative savings rate — are expected to flip those patterns, with Goldman Sachs now saying the U.S. savings rate could be as high as 6 percent to 10 percent this year.
 
“This is not a normal recession. This is a tectonic, structural shift, a global realignment,” says Umair Haque, director of Havas Media Lab. “The post-war industrial era was the era of production. Now we’re seeing the birth of the real 21st-century economy and marketing has to adapt. We’ll see a world where consumption [will] slow — especially in developed countries where there will be a shift from consuming to saving — and production will slow.”

Gallup chief economist Dennis Jacobe concurs that “a fundamental change is taking place” in the behavior of U.S. consumers, even if it’s not clear how permanent it will be. While gas prices have dropped 57 percent since peaking last July, cheaper petrol has done little to loosen consumer purse strings. And for more affluent American households, their declining confidence and spending track with a time line that started last fall with Lehman Brothers’ bankruptcy filing, and worsened with the once-unimaginable sale and bailouts of troubled financial institutions that quickly followed.

“Last year as gas prices rose, lower-end consumers pulled back and those in the higher end continued to spend, using home equity and credit cards,” Jacobe says. “That began to change in mid-September as everything unwound. Even for the rich it’s not fashionable to be spending right now.”

As the country’s excesses were laid bare with the collapse of its debt culture and layoffs mounted, a new sense of back-to-basics frugality and common sense has taken hold. It’s as much an attitudinal backlash as it reflects diminished assets, and it didn’t take long for advertising to appropriate the mood in everything from coffee to gems. Last month, for instance, a Seattle McDonald’s franchise operator taunted Starbucks in its hometown with billboards proclaiming: “Large is the new grande” and “Four bucks is dumb.” In its fourth-quarter pitch, De Beers positioned diamonds as something to be passed down among generations in a world of “disposable distractions.” Whether bling-seeking consumers buy into copy like “here’s to less,” the sentiments seem to sum up the larger mood of the country.

“The last cataclysmic event was 9/11, caused by a terrorist attack. It was patriotic to get out and shop,” says Alison Burns, global client services director, JWT, New York. “This downfall is of our own making — greed, mismanagement and all sorts of things much closer to home. Now it’s not patriotic to go shopping. It’s all about being prudent, back to basics, valuing the things we have more highly.”

Allstate Insurance addresses the economy head-on in new work with spokesman Dennis Haysbert standing in front of Depression-era photos while talking about how in tough times “people start enjoying the small things in life: a home-cooked meal, time with loved ones, appreciating the things we do have…”

“There’s rapid change under way. Consumers seem to be right-sizing and looking for smart money management,” says Lisa Cochrane, Allstate’s vp, marketing.

Ben Kline, chief strategy officer at Allstate agency Leo Burnett, says that for consumers it’s not just a matter of cutting back, it’s about their reassessing what’s important.

“We’re seeing a shift from a trade-up culture to a trade-off culture,” he explains. “‘What brands are going to be part of my life, which ones are indispensable or dispensable?’ Value alone is not a differentiator; there will be value or there won’t be a sale. Marketers will do well in understanding how to frame the trade off and reintroduce themselves.”

Kline, whose agency works for McDonald’s, adds: “The ‘apex predators’ of categories that didn’t add enough value as consumers traded up are going to be in trouble. People are realizing they don’t need a $4 latte; $4 goes further at McDonald’s.”

Which may go some way in explaining the disparate results of the two iconic brands: In the fiscal fourth quarter, ended Sept. 28, Starbucks reported a 96 percent drop in quarterly earnings growth while McDonald’s reported an 11 percent increase in its Sept. 30th third quarter. The definition of value may have less to do with increased unit sales and more with actual consumer benefits.

“In the industrial era, we were good at creating perceived value. But now people are getting back to basics and the future of marketing is to create real value,” says Haque of Havas’ Media Lab. “Perceived value is for consumers; real value is for people. Perceived value is about how much can we get people to consume and that is patently at odds with the new realities of the economy. Real value delivers long-term outcomes, making people smarter, better off, healthier.”

Even with America’s No. 1 pastime, media, consumers are reevaluating their spending. Last summer, as gas prices peaked, Mediaedge:cia asked consumers in smaller, rural counties what their priorities were. Food came in at the top, followed by gas to get to work, cell phones and broadband. Interestingly, TV was not among those top choices.

“We’ve reached a plateau about whether people are really getting their money’s worth,” underscores Lee Doyle, North American CEO, Mediaedge:cia, who says the average U.S. household spends $270 a month on communication technology services. “This is going to accelerate what is already starting to happen: People are going to discover things like Hulu [a free, online streaming video, TV and movie provider] that much faster because they’re strapped. It’s not just techies, it’s the Wal-Mart consumer. Whether it’s Netflix or DVDs from the library or the wealth of video online, that’s scary for marketers. It just accelerates what we know about consumers as being more and more in control of their media.”

There is, of course, the irony that as consumers do the right thing for themselves by saving more, they hurt the economy’s chances of revival by spending less, the “paradox of thrift” as put forth by John Maynard Keynes. To be sure, younger U.S. consumers haven’t suffered the financial reversals of their elders. Their spending may be temporarily reined in during the current credit crunch, but they have a love of brands and their acquisitive tastes show little signs of giving up instant gratification and a “luxuries-as-necessities” lifestyle.

But back in the larger world, there are macro challenges, beyond boomers’ fears about funding retirement, which could further thwart a return to healthy spending.

Robert J. Samuelson, author of the new book, The Great Inflation and Its Aftermath: The Past and Future of Affluence, says the coming era may usher in a new consumer mind-set he describes as “affluent deprivation.” People will feel poorer because at the same time their income growth slows, they’ll be paying more towards higher taxes, energy costs and healthcare. “When people think of their standard of living, they think of discretionary spending, which has always been an expression of their freedom,” says Samuelson, a Newsweek writer. “While their income may not go down, their discretionary spending could remain stagnant or decline.”

The global financial crisis has, of course, slowed growth in previously hot, emerging economies like China. Less obvious may be the population drop in large Western European markets. Bain & Co.’s Almquist notes that there is a declining populace in countries like Spain, Portugal, Italy and Germany. “Marketers face not only the possible change toward more conservative boomer behavior, pre-retirement, they’re also going to have fewer customers there in absolute numbers. Marketers are going to have to be relentlessly focused on where value is and on their core customers. It’s not going to be like the 1950s where you can throw anything out there and see growth,” he says.