A Shift in Spending Behavior

In earlier posts at Financial Armageddon (e.g., "Another Industry that Is Not Recession-Proof" and "Recession-Proof?"), I pooh-poohed the popular notion that certain sectors will somehow be unaffected by the powerful recessionary winds sweeping across America.

Record high debt levels, ultra-low personal savings rates, and a U.S. -- and world -- economy that has been overly dependant on a free-spending American consumer virtually ensure that the fallout from economic contraction will be widely felt.

Even the consumer staples sector, which has been seen as something of a safe haven, is unlikely to come through the troubles ahead unscathed as competition increases and spending habits change.

It seems to me, for instance, that personal and household product companies have in recent years focused their attentions on "aspirational" shoppers, many of whom have tended to spend more than they could afford. In future, consumers like that will be few and far between.

Many major-brand makers also seem to have lost touch with how pricey their goods have become as a result of the numerous price increases that they were able to push through during better times.

Indeed, I've often wondered whether people will keep paying twice as much for Proctor & Gamble's Tide detergent, for instance, as for other brands. Based on my own experience doing laundry (I'm no slouch, by the way), rival -- and cheaper -- products seem to do as good a job cleaning clothes as P&G's iconic offering.

Well, it looks like growing numbers of Americans, either out of choice or necessity, are starting to reevaluate their habits as far as spending on "necessities" is concerned. In a post at MSN Money's Top Stocks blog, "Pinching Pennies: Consumers Switch Brands," Anthony Mirhaydari details what could be a potentially far-reaching shift in behavior.

It looks like there's a positive side to the economic slump after all: Consumers are quickly changing their spendthrift ways.

During the second quarter, Americans lifted their savings rate to 2.6% from a pitiful 0.3%, while real consumer spending net of medical care, food, and utilities clocked in at only 0.8%. It's "a vivid sign that frugality is now replacing frivolity," in the words of Merrill Lynch economist David Rosenberg.

This means healthy market-share gains for private-label groceries from companies like Supervalu, Kroger, and Safeway. The transition away from expensive brands is especially noticeable in more "commoditized" products where the fancy national brand hasn’t noticeably differentiated its products. Think trail mixes, egg substitutes, salad dressing, butter, canned vegetables, etc.

According to point-of-sale data from AC Nielsen, market share for private-label goods such as these increased percentage point to 21.4% during the second quarter. That's up from smaller gains earlier in the year -- so we're definitely seeing an accelerating trend.

You can't really blame consumers for making the switch. On top of a weak employment outlook and tightened credit availability, big branded food companies like Kraft, ConAgra, and Campbell Soup have been passing on rising input costs. Prices on these items increasing 5.8% during the second quarter, according to AC Nielsen scanner data.

Although the grocers come out as the winners here, they still must contend with the same rising raw food costs. In fact, private label prices were up 9.4% during the period, albeit from a lower original level.

But while the price gap between branded and generic products is narrowing somewhat generally, a company-level analysis by Citigroup analyst David Driscoll shows Kraft, ConAgra, and Campbell Soup vulnerable as many of their key products are actually demonstrating a widening price gap compared to private label alternatives. A larger gap increases the consumer's incentive to trade down, as carefully constructed brand equity is ravaged by price disparity.

ConAgra is worst off; not surprising considering its brand lineup is heavily focused on simple staples like corn, beans, and potatoes. After boosting prices nearly 8% for the quarter, price gaps versus the generic labels are widening in six of the company's top 10 product categories -- which is up from a widening in just one category four months ago. ConAgra's unit volumes declined nearly 6% for the period. Comparative private label volumes were up 1.3%.

Kraft was next on the hit list, with volumes down 6.2% compared to a 0.7% gain for the private labels on a widening price gap in seven of its top ten categories. Campbell's volumes declined roughly 4%, while generic competitors increased 1%, as the gap widened in two of the soup maker's top five product types.

One important caveat to all this is that the AC Nielsen data captures the traditional food, drug, and mass retail channel which represents about 60% of total U.S. food sales. It notably excludes Wal-Mart, which has a much weaker generic label presence but is renowned for its ability to keep vendors from raising prices.

America's newfound frugality shows up everywhere from a reduction in the size and number of vehicles driven to a reduction in causal restaurant traffic. The grocery sector is the latest place to profit from the shift.

Comments

[roger]

Five western countries will be particularly affected by the collapse of the capital-based pension system
- Excerpt GEAB N°23 (March 2008) -
news to cheer u up

[roger]

could A Shift in Spending Behavior lead to a shift in family values?when I was a kid i still remember coming back from school those wonderful smells in my mothers kitchen,no such thing as kraft,campbells or the likes of that crap it was family life at its best,my 3 sons now 58 49 and 46 enjoyed the same life style and my 3 grand daughters love coming to our house, by the way we all share the work,

[bobby jones]

this seems reasonable; people are watching less TV and, thus, they are being influenced less to buy expensive brands; and, those who watch TV, enjoy TIVO'ing.

[BlackStarRanch]

....and lets not forget the most clever concept in marketing: redesign of the package (new & improved!) and then decreasing the amount of the product in the new package. Example: "Kroger Value Sugar; 3 for $5.00. And then in small print: 4-lb bag. (sugar normally comes in a 5-lb bag) Though tuna used to be 6.5 oz. per can, then 6.25 oz., now it's 6-oz. per can - nothing beats a cow, chickens, a garden, and 2-teenage sons who realize where dinner's coming from.

[roger]

good point BlackStarRanch,most people don't know but this is why the food industry fights the metric system (no cheating there)

[Thomas Shawn]

If people switch to other brands then, in theory, it will not affect the sector. For investors, they'll still have to do their fundamental analysis due - diligence.

Cautious investors may want to consider ETFs rather than equities in particular companies. Reference XLP.