Economic Blues Color Holiday Outlook Consumers dialing down on holiday spending

Economic Blues Color Holiday Outlook Consumers dialing down on holiday spending

By: James Russo, Vice President, Marketing, & Todd Hale, Senior Vice President, Consumer & Shopper Insights, The Nielsen Company

SUMMARY: Color the 2008 holiday shopping season red for investment losses, white for shredded financial documents and blue for American consumers dealing with the double whammy of failed financial markets and crumbling employment numbers. An equal opportunity offender, the market downturn has impacted all economic strata , including the one-third of high net worth individuals dialing down holiday spending.

Usually it’s weather forecasts that put a crimp in holiday shopping plans, but this year retailers fear a financial “perfect storm” may put the wraps on projected sales. The Nielsen 2008 Holiday Outlook Report forecasts a 4.7% increase in dollar sales, but a potential decline of -0.8% in unit sales, with any nominal gain attributable to higher commodity prices.

Amplifying the effect and timing of the financial crunch is the fact that the holiday selling season (defined as Thanksgiving week through December) accounts for as much as 20% of total sales volume in food, drug and mass retailers in the U.S. Many consumers will be doing slightly better than a lump of coal in their stocking, with 50% expecting to maintain 2007 spending levels, while 35% will be trimming back.

As a general trend, the market collapse has had a chilling effect across all income levels. Even high-income individuals earning $100,000 or more a year will be more circumspect, with one-third stating that they will spend less on holiday treats this year.

There will be growth to those who build competitive advantage, differentiation and loyalty…

All is not doom and gloom, however. While these are very hard economic times, there will be growth to manufacturers and retailers who use the economic slowdown to build competitive advantage, differentiation and loyalty. More than ever, the ability to understand consumers at an increasingly granular level will deliver the insights to drive success.

Pricing unplugged

The theme for Christmas 2008 is value, and consumers will be looking to consolidate shopping trips and capitalize on instant rebates, coupons or everyday low pricing. According to Nielsen, the formats making it onto shoppers’ “nice” list are convenience/gas, dollar and grocery stores, supercenters and mass merchandisers. The formats assigned to the “naughty” list include department and electronic stores, where shoppers expect they’ll be spending 28% less than a year ago, opting to purchase electronics at other formats.

Online shopping outlets will be celebrating an uptick, as 12% of shoppers expressed intent to buy more online and an additional 41% will hold Internet spending constant. The appeals of online shopping are many: 24/7 access, no need to travel and burn expensive fuel, quick comparison shopping, gift wrapping and door-to-door delivery.

Limited additions

Caught between a credit crunch and holiday aspirations, U.S. consumers will be carefully parceling out their expected $98 billion holiday spend across 125 categories and a select number of channels: food, Walmart, drug, mass merchandisers and convenience stores. Holiday highlight categories that outperform the 20% share norm include: musical instruments, a variety of fragrances and colognes, cooking ingredients and wares, festive candles, electronics and the all-important batteries to run everything. These products reflect a closer tie-in to necessity gift gifting as opposed to discretionary spending.

Wired in to demand, Walmart is projected to tie up some 55% of computer electronic product sales, 44% of fresh meat and 43% of pet care products, wooing customers away from food, drug, mass and convenience outlets. Grocery stores should retain their traditional lock on categories such as fresh produce and pasta (84%), and in a nod to the party season (or hearty winter stew recipes), wine (84%). Mass merchandisers will open the throttle on baby needs with a 49% share along with housewares and appliances (40%).

Health care (44%) and cosmetic sales (40%) will dress up results in the drug channel. Meanwhile, convenience/gas store sales will be fueled by immediate consumption products like beer (59%) and carbonated beverages (39%).

Convenience, not price, was the primary driver of holiday online shopping…

Online inroads

Online’s value and convenience propositions will make it a must-use channel for holiday shopping. These high hopes are validated by 2007 performance figures. Nielsen research determined that convenience, not price, was the primary driver of holiday online shopping last year, with 81% of respondents citing the “freedom to shop at any time of day” as a primary motivation, followed by saving time (77%), easy comparison shopping (61%) and the ability to find items easily (56%).

Online shopping has become such an accepted channel, that it has literally redefined key metrics. Whereas marketers traditionally used Black Friday (the day after Thanksgiving) as the litmus test to gauge season performance, Cyber Monday is gaining increasing importance as a sales benchmark. Cyber Monday refers to the first Monday back at work, and at the keyboard, after the Thanksgiving holiday.

In 2007, Cyber Monday traffic spiked some 10% over the prior year, with combined home and work traffic reaching 32.5 million unique visitors. The biggest-pulling categories for electronic shoppers included consumer electronics, toys/video games, books/music/videos, apparel, home and garden, computer hard/software, jewelry, flowers and gifts.

The holiday season contributes nearly 24% of all DVD sales…

Entertaining options

‘Tis the season for DVD sales, which rack up 40% of annual dollars during the fourth quarter. Nielsen reveals that the six week official holiday season contributes nearly 24% of all DVD sales, spurred on by the release of major summer hit movies and retailers using DVD promotions as loss leaders to drive traffic.

Similar seasonality exhibits for book sales, which begin to trend upwards in October and peak the week before Christmas. Roughly 17% of annual book sales occur in the last five weeks of the calendar year. This year should prove to be no exception, with new releases from Eragon author Christopher Paolini, Stephen King and J.K. Rowling.

The gaming industry has demonstrated remarkable resiliency…

The gaming industry bets aggressively on strong holiday sales for both consoles and software, and this year has demonstrated remarkable resiliency against the weak economy. Hopes are running high for a record holiday season thanks to impressive performance by Wii, an aggressive $50/unit price reduction on Microsoft’s Arcade model Xbox 360, and new releases for both the PS3 (Little Big Planet, Resistance 2) and Xbox 360 (Gears of War, Fable II) systems.

Deck the aisles

Survival tips for retailers and manufacturers gearing up for the holiday season include the following recommendations:

  • Manage inventory like never before to avoid extraneous carrying costs in January;
  • Reach out to high-value customers through direct mail or special offers that reward loyalty;
  • Merchandise to fulfill consumer necessities; have-to’s versus nice-to’s should dominate the product mix; and
  • Leverage interest in basic consumer packaged goods such as toiletries, pet care or special holiday food/beverage packs, positioning them as ideal stocking stuffers.

The strategies put in place now will further enhance growth in 2009 as the economy slows and consumers intensify their existing level of behavior with coping tactics such as trading down on products and services and a re-alignment of value-seeking shopping alternatives.