The Consumer Squeeze

Survey shows how shoppers are cutting back their spending

By Paul Carton and Jim Woods

In July, a ChangeWave survey pointed to yet another downtick in U.S. consumer spending, despite the injection of $150 billion in tax rebates that were meant to stimulate the economy.

We found inflation and higher energy costs to be the key reasons why consumers are spending less.

These two factors have been cited as the main culprits in terms of their overall negative impact on consumer spending by an increasingly larger number of respondents since January. And consumer behaviors like reducing debt, saving money and investing more money have declined.

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On Our Radar

In our July survey, we took a close-up look at the impact of inflation and higher energy costs on consumers.

We asked respondents to share what effect, if any, higher energy prices will have on their discretionary spending during the next 90 days.

While 15% of respondents said rising energy costs were having a significant effect on their spending, an astounding 60% said they were having a modest effect -- eight points higher than we registered in our previous survey just two months earlier.

In response to another question, 12% of respondents said their driving had been very much affected by the rise in gasoline prices -- a three-fold increase since the beginning of the year.

But it's not just driving habits that have been altered by rising inflation.

When we asked consumers if rising prices in general had caused them to make changes to their normal spending routine, 50% said yes. And, among that group, 68% said the No. 1 change they've made is eating out less.

Fifty-two percent also reported that they're shopping more at discount stores, and 41% said they're buying lower-cost items.

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This brings us to the "substitution principle" -- consumers swapping out high-cost items with more reasonably priced ones -- including everything from shoppers buying less-expensive brands of food at the supermarket to buying off-the-rack clothes rather than designer labels.

One respondent reported replacing expensive food items with less costly ones.

"I've quit eating steak, lobster and expensive Tex-Mex," he said. "I'm searching out all low-cost options -- eating hamburgers, and not ordering drinks or other costly extras with meals. I'm also sticking with basic needs and avoiding anything not reasonably priced. No more Starbucks -- I now use McDonald's for coffee."

Another respondent wrote: "I'm replacing organics at Whole Foods [with] generics at Ralph's."

Another reported: "I'm buying more store-branded foods rather than national brands like Proctor & Gamble, Kraft and ConAgra."

Here are some other examples of how Alliance members are changing their behaviors to cope with overall inflation and higher energy costs:

• "My clothing and shoes are now from the discount store."

• "I shop for clothes that are on clearance to save money."

• "Discontinued $129 per month Time Warner digital cable TV service and went back to using a free antenna; changed cell phone plan from $120 per month to $45 per month; eliminated storage space rentals."

• "I'm buying auto parts to repair my car rather than spending money on a newer car."

• "I'm buying Wal-Mart clothes instead of Kohl's, Penney's, etc., in some cases."

• "I'm doing more discount Internet shopping without tax or shipping to replace purchasing from local or national merchants. I'm shopping in bulk at discount warehouses. I track grocery sales and double/triple coupons."

• "Bought a motorcycle instead of driving my SUV."

• "[Ride] a bicycle a couple of times a week [instead of driving everyday]."

• "Replaced going out to movie theaters with Blockbuster Total Access."

• "Netflix used instead of going to movie theaters."

• "I brew my own coffee instead of buying Starbucks."

• "I stopped buying most wines, especially those that cost more than $15. Put off projects at home that I cannot do myself. No longer use any maid services and clean my own house!"

• "I replaced a bank account that had built-in fees for services I rarely use [with] a no-frills, free account."

The Bottom Line

Winners and losers are emerging as U.S. consumers continue to make substitutions to compensate for the drag of inflation and higher energy costs.

Although virtually all restaurants have taken a hit because of slower spending during 2008, it's the weaker chains that have really taken it on the chin -- the latest examples being Bennigan's and Steak & Ale, both of which just filed for bankruptcy.

Other recent examples of stores losing market share due to consumer behavior changes include Best Buy (BBY) and the whole gamut of mall giants such as Macy's (M) and Sears (SHLD).

We are witnessing a large-scale migration to discount stores and wholesale clubs with Wal-Mart (WMT) and Costco (COST) among the biggest beneficiaries.

We first reported on a seismic transformation in retail shopping in March (see ChangeWave's March Consumer Spending Report), which was led by sharply lower spending and higher inflation. That huge shift by consumers to the discount retailers and wholesale clubs now appears to have solidified into a permanent, long-term secular trend.

Paul Carton is the Director of Research for the ChangeWave Alliance. Jim Woods is ChangeWave's Senior Editor. The Alliance is a network of 15,000 highly qualified business, technology and medical professionals in leading companies of select industries. The Alliance is surveyed weekly on a wide range of business and investment research and intelligence topics.

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