Posted 8/1/2011 12:00 am
Updated 12 months ago
Years ago Eileen Sotomora of Little Rock would have spent a lot more than $700 on a mattress for her guest bedroom.
Instead, she bought one on sale at Dillard’s for that price just a few weeks ago.
“I guess I was being thrifty,” said Sotomora, who before the Great Recession paid about $3,000 on a mattress for her and her husband, Dr. Ricardo Sotomora.
Meet the new consumer, who thinks it’s fashionable to be frugal.
Still shaken by the recession, consumers are more likely to hold off spending money on discretionary items and trade down on essentials, according to the Oct. 27 report “Forever Frugal? 2010 U.S. Consumer Survey Confirms Persistent Frugality” by the management consulting firm Booz & Co.
Still, consumers will open their wallets if they think the money is well spent. Marketing experts told Arkansas Bus-iness that consumers will buy products and services if they think they have a value and the companies selling the products are trusted.
The wild success of Apple Inc. is the textbook example of a company that has delivered products that consumers covet, said Tom Dougherty, CEO of business consulting firm Stealing Share of Greensboro, N.C.
“Why would anyone pay $499 for an iPhone 4? I know I did,” he said. “I went out and bought an iPad 2 when I had an iPad 1.”
So have other consumers. For the third quarter that ended June 25, Apple reported record quarterly revenue of $28.6 billion and record quarterly profits of $7.31 billion. During the third quarter, Apple sold 20.34 million iPhones, an increase of 142 percent over the same quarter in 2010. It also sold 9.25 million iPads during the quarter, a jump of 183 percent over the comparable quarter a year ago.
Apple plans to open its first store in Arkansas at The Promenade at Chenal on Aug. 20.
Arkansans and consumers around the country have become more frugal, said Michael Pakko, chief economist for the Institute for Economic Advancement at the University of Arkansas at Little Rock.
Pakko said that in 2008 when gas prices were climbing to $4 a gallon, people complained but paid it.
But when gas prices rose in 2011, Arkansans balked at the price, he said.
“More recently people are finding ways to cut back on their gasoline,” Pakko said.
Before the recession, Arkansans spent about 6 percent of their income on groceries. During the recession, it increased to 10 percent, which suggests consumers were cutting back on other items, Pakko said. Or it could suggest that people had less income and were spending the same amount on groceries out of a smaller take home paycheck.
Even though the recession officially ended in September 2009, “consumers remain skeptical and uncertain,” Booz & Co. said in its October report.
In Arkansas, groceries still account for 10 percent of all sales that are subject to the sales tax, Pakko said.
Pakko said he’s not sure what Arkansans are doing with their money that once was spent on other taxable items. He thinks they are putting more money into savings or paying off bills.
Or it could mean that people are buying more groceries instead of going out to eat. Polly Martin, the president of the Arkansas Grocers & Retail Merchants Association, said her grocery members have noticed that families are buying more of the staple items and cooking at home instead of going out to eat. She also said members have reported that prepared food or ready-to-bake items at grocery stores have been a hit with single consumers so they too don’t have to go out to eat.
“The overall trends are that the recession and the habits that got formed during the recession are here to stay,” Kasturi Rangan, a principal of Booz & Co., told Arkansas Business.
Before the recession, consumers responded to retailers’ marketing incentives such as “clearance sales” or “buy one, get one free” offers, said Craig Douglass, a partner in InFocus LLC of Little Rock, a focus group research company.
But not anymore, he said.
Holding clearance sales “says you’re trying to get rid of products that did not previously move well, so the consumer perceives what’s wrong with the product,” Douglass said.
The post-recession consumers aren’t necessarily responding to the lowest price either, said Jim Karrh, who writes the “On Marketing” column for Arkansas Business. So slashing prices shouldn’t be the first reaction of a company, because the move could backfire, he said.
“Once you start cutting prices or doing deals, it’s almost impossible to reverse that,” Karrh said.
What the Customer Wants
“What we have discussed with our clients is that they need to be learning — and learning quickly — more about which consumers have been transformed by the recession and how,” Douglass said. “There’s more emphasis on security and value and an appreciation of a simpler and less wasteful lifestyle.”
What the customer is looking for is trustworthiness and perceptions of value, Karrh said.
“People will spend money if they think it will be well spent,” he said.
For example, bundling items together for a price of three for $3 or five for $5 has been a successful strategy for grocery stores, Douglass said.
“At Kroger you can buy 10 cans of lemonade for $10,” he said. “That is an example of the customer demanding more value where it’s not just based on price. Customers are looking for quality products, value packaged and appropriately priced.”
Karrh said businesses should try to gain the trust of their customers by offering testimonials or guaranteeing the service or the product. That makes the company more trustworthy and sends the message that the company will take care of the customer if something goes wrong, he said.
The post-recession consumer also is doing more research on the Internet, especially for big-ticket purchases.
“The whole buying process has been turned on its head,” Karrh said. “When they walk into the showroom, they already have done their homework.”
He said consumers are turning to the Internet for price comparison and customer reviews on social network sites.
Rangan, of Booz & Co., said he didn’t think that the Internet would replace brick and mortar stores, though.
“Consumers still want to have the experience of touching, feeling, experiencing the product or service first hand,” Rangan said.
But online purchases are making strides, the Booz & Co. report said.
The marketing experts said they think this value-conscious consumer behavior is here to stay.
“I don’t see how the genie ever goes back in the bottle,” Karrh said, “which means it’s incumbent upon businesses to understand value from the consumer’s perspective.”