Todd Hale, SVP Consumer & Shopper Insights and James Russo, VP Global Industry Insights
Amid seemingly contradictory economic datapoints, manufacturers and retailers will need to focus on the habits of the consumer for clarity and insights into the pace of recovery. While consumer confidence in the U.S. improved modestly in the second quarter according to Nielsen, confidence is well below pre-recessionary levels. The rebound in U.S. consumer confidence is indicative of an elongated “L-shaped” recessionary recovery curve, which is characterized by a sharp slowdown, followed by a prolonged or slow recovery period where the return to previous levels of economic growth may be unattainable or (hopefully) longer term. While U.S. consumers are stuck in neutral, emerging economies are driving improved global consumer confidence, indicative of a more classic V-shaped recovery characterized by a sharp slowdown, followed by a fairly rapid recovery where the economy stabilizes and returns to previous levels.
Loan Supply Up – Demand Down
Interestingly, the stalled economy is not due to a lack of available credit. A review of the ISI Bank Loan Survey, that analyzes the lending practices of large national and regional banks, shows a wide gap between the willingness of banks to loan versus actual lending activity (indicative of consumer interest or ability to take on loans or more dept). The survey includes mortgage, credit card and auto lending practices. In the chart below, the axis on the left is tied to the survey and is simply a 0=weak to 100=strong scale.
The axis on the right represents the Federal Reserve's Senior Loan Officer Survey. The numbers represent the percentage of banks more willing to make consumer loans net of the percentage less willing to make consumer loans. This would be for credit card and all sorts of installment credit.
The takeaway from this chart is that until this gap closed, the recovery will not gain momentum. Confidence drives credit, and credit drives capitalism and spending.
Unfortunately, finding a loan may be easier than finding a job. July’s unemployment rate was 9.5%, but when you factor in “underutilized” people that are not working full-time, but would like to be, the rate stands at almost 16.5%—1 in 6. The percent of unemployed longer than 27 weeks is at an alarming 45%. Job losses are not anywhere near as bad as the days when we were losing over 500K+ jobs per month; but the economy needs be creating 200-250K jobs per month to take a solid bite out of the ranks of the unemployed.
At this rate, expectations that a return to normal will either not be achievable or will not occur until well into the current decade. Without a consistent level of job growth, spending will be restrained and confidence subdued.
Value is Here to Stay
The “Great Recession” drove fundamental shifts in consumer shopping and buying behavior. For many consumers, their own personal recession goes on as they continue to look for value. They have replaced pre-recession auto-pilot buying with decisions now based on trade-offs. In the latest year, Nielsen reports impressive double-digit dollar growth for the fastest growing 15 store brand categories versus single-digit growth for 14 of the fastest growing branded categories. In fact, from 2007 through 2009 and year-to-date 2010, store brand dollar share grew across all categories tracked by Nielsen. Store brands are now growing share from lead brands as well as smaller brands.
With increased promotion support from brands, store brand share growth has slowed in recent months, but it has reached a new share plateau from which to launch future growth. Store brand success will continue and will be a risk for mid-tier brands as retailers look to make room for expanded store brands and seek to eliminate in-store clutter and simplify the shopping experience. Manufacturers need to aggressively defend their space and consider store brand manufacturing or direct-to-consumer options. Premium and discretionary brand segments and retailers will need to innovate and work harder than ever to differentiate. Best-in-class retailers and manufacturers will combine new media and digital platforms with traditional methods to directly reach consumers just prior to or at the point of purchase.
As we come to the end of government stimulus programs, the U.S. economy has a long way to go to build jobs, consumer confidence and consumer spending. With financial systems stabilizing, retailers and manufacturers need to be sure they are doing all they can to provide more value and confidence to consumers, as those consumers will ultimately be the ones leading the U.S. out of its economic slump.