The current economic crisis is creating a “new normal” in consumer buying habits. Before the recent downturn, when consumers tried to save money, they traded down from branded products to private-label or so-called value brands. But they tended to keep buying some form of the product; they continued to pay for the convenience of, say, antibacterial throwaway wipes or gourmet frozen foods. In the current economy, they are not just trading down within a category, but switching to “inferior” products and services — paper towels instead of wipes, washcloths instead of paper towels. In the process, they are raising the value of the type of products and services economists call “inferior goods”: those that attract consumers more when purchasing power declines.
This will require a major shift of focus for many consumer-oriented companies. During the past decade or so, marketers have grown accustomed to the trend known as “premiumization”: Each year, consumers sought out higher-priced and more distinctive products. Sales went up for such premium goods as custom-blended cosmetics, microbrewed beer, antioxidant-laden breakfast cereals and soft drinks, and cars in every price range that featured amenities like video screens and extra cup holders.
Premiumization will never go away completely. But suddenly it has moved to the slow lane. The reason, of course, is the continuing economic downturn. In the U.S., unemployment rose from 4.6 percent to 5.7 percent between July 2007 and July 2008; average gas prices rose from US$2.90 per gallon to as high as $4.15 in one year; and real income and consumer spending have decreased dramatically. All of these factors, along with the meltdown of the mortgage and financial markets, have eroded consumer confidence to a 12-month low.
The net impact has not been gentle on premium products, even the relatively inexpensive or everyday kinds. Retail sales figures for the second quarter of 2008 showed declines of 0.7 percent for Target Corporation (versus a gain of 2.7 percent for Wal-Mart Stores Inc., which has much less of a premium focus in its category) and a significant “mid-single-digit” decline for the Starbucks Corporation. Although Target and Starbucks, the premium competitors in their particular categories, have had other difficulties, there is no denying that the market is not going their way.
The same is true for “casual dining” table-service restaurants like Applebee’s and Red Lobster, which, for many of their patrons, represent a premium category. Until recently, casual dining constituted the fastest-growing restaurant segment, but now it is losing customers. Indeed, this is part of a significant shift throughout the food industry. The food component of the consumer price index has risen 7.4 percent over the past 18 months, outpacing both income (6.6 percent) and total household expenditures (6.4 percent). Faced with increasing food prices, people are forced to trade down. Previously, a consumer encountering difficult times would treat it as a temporary problem and switch food sources within a subcategory — from, say, Boston Market (where a meal might cost $12 to $13) to Chipotle (where it might cost $8 to $9). But that consumer would still patronize a “fast casual” restaurant. Now people are either switching categories to quick-service restaurants like McDonald’s or decreasing the frequency of dining out altogether, switching to inferior goods such as packaged foods that they prepare at home — products that they didn’t patronize in the same way before, when they perceived themselves as having more options because their purchasing power was greater.
A Trend Toward Trading Down
The idea of inferior goods might seem to confound common sense. Why would people increase their purchases of one item in difficult times? Wouldn’t they cut back on everything? But there are recognized historical examples (even though there continue to be academic debates about which examples are most applicable). One classic story is that of the Irish potato. During the famine of the 1840s, almost one-quarter of the population of Ireland starved to death or were forced to emigrate. Yet even as potatoes grew scarce and their price rose, demand for them apparently increased even more than when prices were lower. Economists later hypothesized that potatoes became an inferior good; as everyone’s incomes decreased, even the relatively wealthy consumed more potatoes. This further depleted the food supply for everyone.