Just as the Great Depression left an indelible mark on Americans who went through it, the past two years of economic pain and high unemployment has rewired today’s consumers.
Call it the frugality revolution: After years of spending mindlessly on clothes, gadgets, granite countertops and each season’s top electronic toy, American’s are taking control of their finances, and searching for real value.
Cheap — once a dirty word — is now chic, even with some of the most affluent shoppers who have watched their real estate and other investments plummet, says Marshal Cohen, chief industry analyst for NPD Group, a market research company.
“Even the wealthiest customers have learned to shop with any eye on the thrifty spend,” he says. “You now have wealthy consumers shopping the least expensive stores.”
The Shift to Thrift
Take Jim Wolchok, for instance, who owns a commercial real estate services firm in Los Angeles. Wolchok, 55, lives in a multimillion dollar house in Beverly Hills, owns eight buildings in Manhattan’s Soho neighborhood and has vacationed in 55 countries as well as Antarctica — and he clips coupons.
“I am great with coupons,” he says. “I can walk into a CVS and buy $30 worth of stuff and pay $12. I really like to go out and see how much I can save.” Wolchok uses coupons from the Entertainment Book for discounts on movie tickets and dining out. He buys discount dining certificates at Restaurants.com and he brown bags his lunch four days a week.
Wolchok started paring back a couple of years ago after pouring through credit card bills and noticing how reckless his spending seemed. It became more of an imperative after his income fell 20 percent in 2008 and his monthly mortgage jumped $800 last year. “When your income has dropped you have to be smarter,” he says. “I cut $1,000 off my bills each month.”
Wolchok still lives pretty comfortably in his posh house with a pool and spa and views of Los Angeles. He hasn’t cut out vacations, but he visits Hawaii now instead of Nepal.
The New Rules
Just how long Wolchok and others will retain these newly frugal ways is unclear — maybe until unemployment is back down to 5 percent and retirement savings are replenished.
“Right now most people are just focused on maintaining the status quo,” says Derek Rucker, assistant professor of marketing at the Kellogg School at Northwestern University. “They don’t want anything else bad to happen to them.”
Indeed, to most Americans, the good times still seem a long way off. Retail sales may be ticking up — rising 1.6 percent in March, according to Commerce Dept. data — but claims for jobless benefits have also climbed in recent weeks, keeping most consumers focused on preserving what they earned.
“They’re not interested in spending unless it’s broke and they have to replace it,” Cohen says. Or, he says, they’ll open their wallet if it’s a completely original product like the iPad or those $150 sneakers that promise to tone your thighs while you walk.
When they do buy, they’re taking more time to research and comparison shop and scour the Internet for discounts. These days, everyone is proud of saving a buck, hourly workers and company heads alike.
“There is a new appreciation of frugality,” says Mary Hunt, the creator and editor of the Web site Debt-Proof Living. “It makes people feel good to do more with less. It’s empowering.”
For many, trading down has meant greater enjoyment and connection — not a feeling of deprivation. “AnnMarie,” responding to a post on Debt-Proof Living’s online forums, says she only goes out to a movie once every two months now, rather than every week. Instead she rents $1 videos from the Red Box kiosk and buys discounted candy from her local drug store.
“This small change has made family time better for all of us. My daughter and I talk more; sometimes play a game or two,” she writes. “You can’t do much talking in a movie theater!”
Likewise, Daniel Koontz, who pens the food blog Casual Kitchen, says he now prefers entertaining friends at home to dining out. “It is far more memorable,” he says. “If you can cook at all, you can put on a great dinner party for four, six or eight friends for a fraction of the cost of a group dinner out at a nice restaurant.”
Koontz remembers pouring through a stack of credit card receipts from 2008 and not even being able to remember anything about the experience or the food. “I thought to myself: What a total waste! I spent $65 on this dinner and I don’t even remember it?”
Of course, Americans made some of the same promises about cents and sensibility after the economy slumped after 9/11. Then many of them went on to spend like drunken sailors, using their houses as ATM machines to fuel the spree.
So Is Luxury Really Dead?
The luxury market is once again showing signs of life, with companies such as LVMH (Moët Hennessy • Louis Vuitton) posting double digit sales growth, compared with last year’s abysmal numbers. This time, however, it’s the truly wealthy spending, analysts say, and not the upper middle class who stretched beyond their means to buy that Louis Vuitton bag.
Still, even the wealthiest Americans have been changed by this prolonged recession that toppled long-held beliefs and longstanding institutions. “[The wealthy] are far more discerning than they were,” says Milton Pedraza, CEO of the Luxury Institute, a research firm. There’s less waste, he says, and less buying of flimsy “junk.”
Logos are retreating inside clothing, and people are hedging their designer shoe purchases when they show them off. “The first thing someone will say is, ‘I got them on sale,’” says Liz Dunn, senior retailing analyst at Thomas Weisel Partners. Or, they’re emphasizing that the Aston Martin idling at the curb was bought used, rather than new, says brand strategist Eli Portnoy of the Portnoy Group in Miami.
“Frugality will still be part of the concept” as the economy recovers, Cohen says. “You now have to justify why the product is better or worth more money.” Adds Portnoy: “We’ve all come to understand that value means something different than it used to.”
Victors in the Frugality Revolution
Three companies that have prospered from America’s shift to thrift
One of the ten best performing stocks in 2008 was retailer Family Dollar. Here’s a snapshot of three not-so-glamorous companies that have flourished in the shift to thrift.
•American Italian Pasta Co. (AIPC)
You’d have a hard time finding a cheaper family meal than spaghetti at 50 cents a package. So it’s no big surprise that the country’s largest dry pasta maker has fared well over the past two years.
That wasn’t always the case. Back in 2004, the Atkins diet craze had people writing the epitaph for pasta companies and their carb-rich products. AIPC and others in the industry responded with more healthful pasta offerings, such as spaghetti made with whole wheat and penne enriched with protein or omega-3s.
But it was AIPC’s humble semolina — sold under the supermarkets’ own store brand — that really came through for the Missouri-based company, as more people looked for ways to stretch their food budgets. For many who had relied on takeout when times were good, it was a safe bet. You just had to boil water.
The publicly traded company posted net income of $88.3 million, or $4.10 per diluted share, in fiscal 2009, more than triple the $19.1 million, or 99 cents per share, it made the previous year. Total revenue grew 10 percent to $628.2 million.
“We’ve had a great couple of years,” says CEO Jack Kelly. “We are teaching people that they can still enjoy all of their favorite foods, they just don’t need as much of them if they add pasta.”
MagicJack is a $20 plug-in USB device that lets you make unlimited domestic calls over the Internet for $20 a year.
Launched at the height of the recession in 2008 and hawked on infomercials, MagicJack has sold 5.3 million units in the last two years. Grossing over $200 million for its owner and founder Dan Borislow, it has now rolled into such mainstream outlets as Best Buy and Walmart. “The [bad] economy definitely helped,” says Borislow. “Everyone was looking to cut their bills.” AT&T’s decision to hike local phone rates in certain areas by more than 20 percent last year probably didn’t hurt either.
•Jarden Corp. (JAH)
The manufacturer responsible for Crock-Pots, Ball canning jars, Food Savers, Sunbeam toasters, and Mr. Coffee has seen its fortunes swell as consumers embrace ‘do-it-yourself.’
Its “brands for everyday living” — from coffee pots to fishing poles to sleeping bags — average $30, an easier sell for cash-strapped consumers, says William Chappell, an equity analyst with Sun Trust Robinson Humphrey.
“People might not be buying Cuisinart in a recession, but they’ll buy Mr. Coffee,” says William Chappell, an equity analyst with Sun Trust Robinson Humphrey. Jarden reported adjusted net income of $68.5 million, or 77 cents a share, beating analysts’ expectations. Revenue rose 3% to $1.35 billion and the company said it expects sales growth across each of its business units in 2010. Its stock has swelled 68 percent in the last year, rising to an average of $33.76 in April, from $20.10 in April 2009.