February/March, 2010

From the Editor

When Value & Profit Have New Meaning

The current recession has seen consumers shifting within categories — the infamous “trading down” effect. Dinner-house restaurant customers are shifting to fast food, fast-food customers to retail stores, and high-end, mainstream retail shoppers to retailers that offer significant value propositions.

Even recognizing that people are trading down is difficult for retailers and manufacturers to deal with, and much response to such trends is counterproductive. Brand images, painstakingly established over decades or centuries, are suddenly blurred by a panic to reposition.

The real opportunity in changing times lies not in observing the obvious — the waves on the ocean; it lies in understanding the subterranean currents, the deep causes of the surface anomalies.

This recession hit like a bomb. Consumers, realizing a lifetime of value creation was suddenly lost as mortgages exceeded the values of homes and 401Ks withered, shifted gears. From a spending mode, they pivoted to a debt-reduction and asset-enhancement mode.

In a macroeconomic sense, this was a big problem. In what John Maynard Keynes called “the paradox of thrift” in his Treatise on Money in 1930, what is good for an individual or family — saving, not spending — is a disaster for the economy as a whole if everyone does it at the same time. One reason all the “stimulus” doesn’t work is that it’s a trickle sent to battle a tidal wave. If every American family wants to save itself into solvency — and every family should and the government shouldn’t want to stop them — even a trillion dollars spent wisely will not be able to overcome a tsunami of consumer savings.

Still, the “spending strike” was inherently a temporary position. At some point, consumers would feel they‘d reduced debt sufficiently and would change spending habits — but when and how was a mystery.

The bigger question was what would be the long-range impact of the sudden wealth collapse. Some theorized we would see a neo-Depression mentality in which people hoarded money out of fear. We’re not out of the recession yet, but the suffering does not seem so widespread and the prospects not so hopeless as to create that type of response.

The psychological response to the economic changes took a specific form and is now transitioning. Beyond what people did to address their personal economic situation, ostentatious displays of wealth suddenly became unseemly. The logic was simple: Much of what people spend money on is to influence the way they feel about themselves and that, in turn, is heavily influenced by the way others view those purchases.

If one lived where many people had been laid off or were no longer getting bonuses or where housing had declined precipitously, a showy display of wealth at a party could easily come off as a slap in the face to friends and relations who could no longer afford such luxuries.

Once ostentation was “out,” the question became what would be “in.” Even if people don’t want to be ostentatious, they still want to strut their stuff. You see this as a cultural habit where wealthy people don’t walk around in suits; they dress down in jeans — but the jeans are subtly different and very expensive, and everyone who matters knows what each brand costs.

The transition that seems to be occurring in consumer thought and behavior, among those consumers who have not lost their jobs, is a transition away from ostentation and toward quality and value.

This poses some challenges for both retailers and producers, especially in the food sector, because it’s easier to sell the sizzle — the ostentation — than the steak — the quality and value.

Some retailers are perfectly positioned for this consumer repositioning. Go to suburban barbecues, where two years ago everything was proudly proclaimed to come from Whole Foods and you often find everything, even more proudly, procured from Costco.

The sense is that the food is high quality but that one can and should take pride in not being ripped off. It’s hard to gain prestige with one’s friends and family if they think you’re a sap, overpaying for everything.

This battle for the new hearts and minds of consumers will be fought in fresh foods. The definition of quality has shifted and it is simply impossible for canned vegetables, say, to be perceived as high quality. Fresh and quality, if not quite siblings, are certainly kissing cousins.

The pursuit of quality and value through packaged goods is a loser’s game. The quality is obviously identical; no store can have better quality than another, and the value proposition becomes simply a matter of price. So everyone competes until no one makes any money.

The solution is to sell fresh foods that uniquely position a store as a high-quality vendor and that allow for a price point where simultaneously consumers feel that they are getting a value and retailers get a reasonable profit. That positioning is the sweet spot in the market, and smart retailers are swinging hard to connect with consumers. DB