Podcast addresses today's frugal consumers

by Bryan Salvage
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NEW YORK – Even though consumer confidence is at its highest level since November 2008, it doesn't mean consumers are spending more, according to a recent Rabobank podcast. Once focused on premium products, consumers now place a premium on value -- and they are not likely to revert once the recession recovers.

An economic recovery would help loosen up consumer purse strings and improve some of the consumer confidence levels, said Stephen Rannekleiv Rabobank's Food & Agribusiness Research and Advisory executive director. "But many of the pre-recession spending trends were somewhat unsustainable," he added. "I think consumers have changed."

In the podcast, Mr. Rannekleiv discussed how the economy has created more price-sensitive consumers who are looking for less-expensive alternatives, reducing spending and increasingly using coupons. He added, however, the key is whether these trends are permanent or likely to revert to previous patterns once the economy improves.

"This increased price sensitivity of consumers comes on the heels of an unprecedented trend of trading up," he said, "where you saw consumers willing to spend more for small luxuries and premium products."

Although consumers were trading up, companies were able to profit from investments in acquisitions, as well as brand positioning and image. However, with consumers migrating to less-expensive options, returns on those investments are now not meeting expectations. How companies respond -- whether waiting out the down turn or making changes to their products and brand position to become more value oriented -- depends on whether they believe the recession is cyclical or secular.

"Food and beverage companies need to be prepared for more frugality from consumers," Mr. Rannekleiv said. He further estimates frugality could be an important consumer trend for the next five years.

In addition to higher unemployment rates, much of this change can be attributed to the loss of wealth U.S. households have experienced from the declining stock market and housing values. From the third quarter of 2007 to the fourth quarter of 2008, U.S. households have lost nearly 20% of their wealth and those losses continue to decline.

"Moving forward, consumers are starting to replace some of that lost wealth by increasing their savings, and some of this increase in savings is often cited in one of the causes in the dip in consumer spending," Mr. Rannekleiv said.

As the economy turns around, consumer confidence may increase further and the level of spending may also increase. However, U.S. consumers may not return to past levels of spending, he iterated.

The full podcast is available online at rabobankamerica.com/rabocast.

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