Jim Woods and Paul Carton

Inflation’s a Huge Drag as Energy Costs Transform Consumer Behavior

Back in July, a survey of 4,525 consumers pointed to yet another clear downturn in U.S. consumer spending – despite the injection of $150 billion in tax rebates to stimulate the economy.

In that July survey, we focused on the key reasons why consumers are spending less. As the following chart shows, the chief culprits are Inflation (56%; up 4-pts) and Higher Energy Costs (56%; up 7-pts).

These twin factors have skyrocketed since January in terms of their overall negative impact on consumer spending. Meanwhile, other consumer behaviors like Reducing Debt (24%), Saving More Money (18%) and Investing More Money (8%) have declined.

But there’s far more to this story. We’ve taken a close-up look at the impact of inflation and higher energy costs on consumers.

First, in our July survey, we asked respondents to tell us what effect – if any – higher energy prices will be having on their discretionary spending over the next 90 days – and while 15% of respondents said rising energy costs were having a Significant Effect on their spending, an unprecedented three-in-five (60%) said they were having a Modest Effect.

All told, that’s 8 points higher than in our previous survey of just two months earlier.

In another related question, 12% of respondents said their driving had been “Very Much” affected by the rise in gasoline prices – a three fold increase since the beginning of the year.

But it's not just driving habits that have been altered by the rise in inflation.

When we asked consumers if rising prices in general had caused them to make other changes to their normal spending routine, one-in-two (50%) said yes. And among that group an extraordinary 68% said the number one change they’ve made is to Eat Out Less.

Note that 52% also reported they're Shopping More at Discount Stores, and 41% said they’re Buying Lower Cost Items. Which brings us to perhaps the most interesting transformation of all – the “substitution principle” – which includes everything from shoppers replacing their steaks with hamburgers, to buying off-the-rack clothes rather than designer labels.

For example, respondent JLE0128 reports he is replacing expensive food items with less costly ones. “I’ve quit eating steak, lobster, and expensive Tex-Mex,” he writes. “I’m searching out all low cost options – eating hamburgers, not ordering drinks or other costly extras with meals. I’m also sticking with basic needs and avoiding anything not reasonably priced. No more Starbucks – I now use McDonald’s for coffee."

Member GAM91914 adds, “More pasta and rice dishes are being eaten, with less dairy and meat.” Respondent PEN02292 says he’s "replaced organics at Whole Foods for generics at Ralph's” and RIC00696 is “buying more store branded foods rather than national brands like Proctor & Gamble, Kraft and ConAgra.”

DOM95250 says, “I now make peanut butter & jelly sandwiches to take to work instead of going out."

Below are some other examples of how consumers are changing their habits and behaviors to cope with overall inflation and higher energy costs.

• KON58654 writes, "Clothing and shoes are now from the discount store."

• SON03970 writes, "I now shop for clothes that are on clearance to save money."

• WEB18822 writes, "Discontinued $129.00 per month Time Warner digital cable TV service and went back to using a free antenna; changed cell phone plan from $120.00 per month down to $45.00 per month; eliminated storage space rentals."

• LIN02874 writes, "Buying auto parts to repair my car rather than spending money on a newer car."

• DMS93208 writes, "Wal-Mart clothes instead of Kohl's, Penney's, etc. in some cases."

• RGA52560 writes, "More discount internet shopping without tax or shipping to replace purchasing from local or national merchants. Shopping more bulk at discount warehouses. Track grocery sales and double/triple coupons."

• DRM1144 writes, "Bought a motorcycle instead of driving my SUV."

• BWH48924 writes, "Replaced gas for car with a bicycle a couple times a week."

• TRA3972 writes, "Going out to movie theaters – replaced with Blockbuster Total Access."

• ARL47234 writes, "Netflix used instead of going to movie theater."

• MRG02762 writes, "I brew my own coffee instead of buying Starbucks."

• CHI6274 writes, "Drink coffee at home."

• TFW6544 writes, "I stopped buying most wines, especially those over $15.00. Put off projects at home that I cannot do myself. No longer use any maid services and clean my own house!"

• DIC99036 writes, "I replaced a bank account that had built-in fees for services I rarely use for a no-frills free account."

As U.S. consumers continue to make substitutions to compensate for the drag of inflation and higher energy costs, both winners and losers are emerging.

For example, although virtually all restaurants have taken a hit because of slower spending during 2008, it’s the weaker chains have really taken it on the chin – the latest examples being Bennigan’s and Steak & Ale, which just filed for bankruptcy.

Other recent examples of stores losing market share due to consumer behavior changes include Best Buy (BBY; 9%) and the whole gamut of Mall giants such as Macy's (M; 8%) and Sears (SHLD; 5%).

At the same time we are witnessing a large-scale migration to discount stores and wholesale clubs – with Wal-Mart (WMT; 25%) and Costco (COST; 16%) among the biggest beneficiaries.

Talk about substitution!

Back in March, we first reported on a seismic Transformation in Retail Shopping – led by sharply lower spending and higher inflation. That huge shift by consumers to the discount retailers and wholesale clubs now appears to have solidified into a permanent, long-term, secular trend.

Jim Woods co-wrote this article.

Article Tags: Energy Costs, Higher Energy

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