The Great Consumer Reset

Repositioning Your Business to Win in the Post

Post-
Recession Era

One North Franklin Street • Suite 2100 • Chicago, IL 60606 • 312.357.6740 phone • 312.357.6750 fax • www.bridgestrategy.com
www.bridgestra
Bridge Strategy Group LLC
 T HE G REAT C ONSUMER R ESET
Repositioning Your Business to Win in the Post-Recession Era
“The current global crisis is
‘vastly worse’ than the 1930s
[…]”
Nassim Nicholas Taleb
Scholar and Author
May 7, 2009
Bridge Strategy Group LLC ©2009
E
Every day, seemingly every hour, comes another story of
economic gloom about struggling consumers or insolvent
companies. In the middle of the worst recession in over 60
years, what can companies do to avoid becoming another
sad headline and, as importantly, to emerge stronger once
the economy begins to recover? According to research and interviews
conducted by Bridge Strategy Group over the past three months, the
answer is: plenty.
After a long and prosperous cycle of growth and wealth creation,
consumers have been caught in the middle of an economic storm of
historical proportions. Many aspects make this downturn
fundamentally different than past recessions, and the seriousness of
the crisis of consumer confidence is, we believe, at the core of the
issue. As economic commentators begin to report on signs of recovery,
we must not confuse the end of the economic recession with a return
to normalcy.
Our view—and the data we have analyzed corroborate our
perspective—is that this economic shock has the potential to create
fundamental and lasting changes in consumer attitudes and values.
We are entering a new era of non-conspicuous consumption that will
redefine our notions of “normal.”
As a result, consumer product executives (manufacturers and retailers
alike) must develop a clear understanding of how (and what)
consumers are being specifically impacted, what observable behavioral
shifts may become permanent, and what the critical implications for
their organizations are. Developing these perspectives earlier in the
cycle will help define winners and losers over the next several years
and decades.
COLLECTIVELY, WE HAVE LOST OVER $10 TRILLION OF OUR WEALTH
Since the real estate market reached its peak around February 2006,
consumers have seen the economy, the financial markets, and life as
we knew it go down into tailspin. The economic downturn has already
wiped out over $10 trillion in U.S. household wealth, from home values
to 401-K and pension plans, translating into a 22% decline in our
collective net worth. The final straw is coming from unemployment
rates that are the highest in 25 years and are expected to keep on
rising.
 The Great Consumer Reset |2

Hence, it is not hard to understand why consumer confidence has been

so profoundly damaged. Between August 2007 and February 2009, the
Conference Board’s Consumer Confidence Index has dropped from
over 110 points down to a low of 25 points, the biggest retraction and
lowest the index has been in its recorded history. Consumer spending
has not contracted this severely since the early 1980s, and the
resilience of the spending reduction may only be comparable to what
was observed during the Great Depression.

The Conference Board’s Consumer Confidence Index (1985 = 100)

Jan 1970 – Apr 2009
Current slump in
consumer confidence
160 started in August 2007

“[…] increasing concerns 140

about business conditions, 120

employment and earnings 100

have further sapped 80

confidence and driven 60

expectations to their lowest 40

level ever.” 20 Lowest recorded point ever:

Mar’09 = 26.9
0
Lynn Franco
Jan-70
Jan-71
Jan-72
Jan-73
Jan-74
Jan-75
Jan-76
Jan-77
Jan-78
Jan-79
Jan-80
Jan-81
Jan-82
Jan-83
Jan-84
Jan-85
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Director of Consumer Research
The Conference Board
Source: The Conference Board Consumer Confidence Survey, March 2009
February 24, 2009 Note: Shaded areas represent periods of U.S. recession

CONSUMERS ARE CHANGING RITUALS AND RETHINKING VALUES

After a period of mounting concern, consumers saw economic

conditions deteriorate rapidly in 2008, causing many to quickly reassess
priorities and make major adjustments.

Consumers cut back severely on durables (e.g., automobile, furniture,

appliances) and non-essential non-durables (e.g., clothing, travel,
services), while prioritizing spend on essential categories (e.g., food,
beverage). This has had a tremendous negative impact on Mass
Merchants, such as Target.

Consumer rituals are also changing drastically. According to a recent

survey of 1,000 consumers by Time magazine , 56% are eating out less
at non-fast food restaurants, 46% are going to less movies, and 20%
have not filled a prescription because of the cost. Several similar
studies have showed comparable changes in consumer habits.

Bridge Strategy Group LLC ©2009

 The Great Consumer Reset |3

A heightened emphasis on value and affordability is driving shoppers to

trade down to (and experiment with) less expensive brands as a way to
“stretch the dollar, ” which also explains the recent spike in private
label sales across product categories and retail formats. The longer
experimentation takes place, the harder it will be for consumers to
return to their previously favored brands.

Consumer attitudes toward consumption have evolved with the deteriorating economic conditions

Q3 2007 – Q4 2007 Q1 2008 – Q2 2008 Q3 2008 – Q4 2008 Q1 2009 onwards

Mounting Deteriorating System Lasting

Concern Conditions Shock Reality

Defaults on mortgages
Foreclosures rise
Financial markets
Energy and commodity
“The shopper is in crisis and accelerate

Home values

Credit markets harden

Crude oil peaks at $147
crumble—Lehman
Brothers files for
prices decelerate

Unemployment mounts
accelerate decline per barrel (Jul’07) bankruptcy (Sep’08)
Low fed rates unable to
is now focused on long term (trend began in Feb’06)
Presidential elections: unthaw credit markets

Energy and commodity desire for change
Obama administration
survival.” prices soar

Inflationary risk

Wall Street woes reach
Main Street
releases consumer
relief measures

Consumer confidence
Consumer spending
Looming credit card
plunges (Aug’07) retracts debt and stagflation
Thom Blischok
Wealth evaporates—
home values, 401(K)
concerns

President
IRI Consulting & Innovation Attitude Attitude Attitude Attitude

December 12, 2008 Cautiously Reassessing Making Major Rethinking

Apprehensive Priorities Adjustments Values

Source: Bridge Strategy Group LLC analysis

Channel shifting is also evident, with consumers’ recognition that the

store selection plays a vital role in helping manage the budget.
Consumers are seeking to shop at stores that are perceived as being
less expensive. Consequently, Discounters and Supercenters have
gained share of grocery sales, for example, at the expense of Mass
Merchants and Specialty stores. In addition, as people cut back on
driving, consumers are taking fewer shopping trips and shopping at
stores closer to home.

This newly found frugality has affected consumers across the board.
According to IRI, 50% of shoppers with annual household income above
$100 thousand agree that price has become a more important
consideration than convenience in brand purchase relative to the
previous six months. These more affluent shoppers were, in fact, the
only income cohort that showed an increase in price sensitivity during
that period of time (Q3 2008), pointing to a trend among upper income
consumers to attempt to extend their lifestyles at a lower cost.

But a more fundamental and intriguing question is whether any of the

observable changes in consumer behavior and attitude can become
permanent. In other words, are we witnessing a lasting shift in how we
shop, buy and consume? We believe the answer is yes.

Bridge Strategy Group LLC ©2009

 The Great Consumer Reset |4

TARGETING THE “NEW CONSUMER”

Various indicators point to the fact that we are entering a new era of
non-conspicuous consumption. A “new consumer” will emerge from
this economic cycle that will have different values and concerns than in
the past. The recession, and the trade-offs that followed, is making
consumers across income levels reassess life priorities, rethink their
attitudes towards consumption, and reevaluate fundamental values.
Jeffrey Imelt, CEO of GE, commented: “This economic crisis doesn't
represent a cycle—it represents a reset.”
An emerging thesis suggests that we are entering an era of non-conspicuous consumption

Average Size of New Single-Family Homes (1)

“We are now moving from a (in square feet)

period of post-scarcity to a 2,080

2,349

future of post-abundance.” 1,500

983

J. Walker Smith
1950 1970 1990 2004
President
Yankelovich Inc.
Household Debt (2)
November 1, 2008 (as a % of household income)

So urce: (1) Natio nal Association o f Ho me Builders; (2) Federal Reserve

In addition to the economic forces, two other factors are influencing

and molding consumer values: environmental sustainability, and health
and wellness. These combined effects are creating new approaches to
lifestyle and community. This “new consumer” will live in an age where
“less” is “more,” where an emphasis in “quality” will replace a desire
for “quantity,” and where the pursuit of enjoyment (life), purpose
(community) and fulfillment (family) will supersede a quest for material
success and professional achievement.
While the repercussions of these changes are not yet fully understood,
they do provide enormous opportunity for companies to rethink and
redirect their strategies in order to meet the emerging needs of the
“new normal” consumer. Understanding what permanent changes may
impact your business more significantly is a task that should begin now,
as trends are developing.
Of course, companies are being affected by the recession in different
ways and should be clear about their required areas of focus.

Bridge Strategy Group LLC ©2009

 The Great Consumer Reset |5

For many organizations, for example, conserving cash and boosting

liquidity are still the top priorities to avoid insolvency—without a sound
balance sheet and a robust cash flow position, any other strategic
initiatives will be vulnerable to further market instability. For
organizations whose market positions have become more exposed as a
result of the downturn, a focus on strengthening the core is warranted
to minimize share losses that may prove painful (and costly) to recover.
However, for companies with a strong balance sheet and stable cash
flows, this is a great time to position for growth in an environment that
is likely to be rich in possibilities and highly conducive to disruptive
change. If we have truly hit the “reset button,” then basic customer
loyalty is up for grabs.
“The economic crisis that we In a market environment and in a competitive landscape that are likely
are going in right now to be fundamentally different than what we have witnessed in the
doesn't represent a cycle, it past, we have been advising our clients to focus on five critical activities
represents a reset.” in order to prepare their organizations for the next phase of growth:
1. Know your consumer/shopper
Jeff Immelt
This is definitely the time to develop superior consumer/shopper
Chairman & CEO
General Electric insights, and to consider the specific strategic implications for the
November 6, 2008 organization—what segments to focus on, what channels/stores to
prioritize, how go-to-market efforts should be organized, where
resources should be allocated, what organizational capabilities will
be critical for success, etc. This requires companies to go beyond
the generalities of syndicated data and broad-based consumer
surveys. This in-depth knowledge will be critical for devising ways
to target this “new consumer” with products and services that will
meet their recession and post-recession needs.

2. Understand the specific implications for your organization

With a clear, in-depth understanding of consumers/shoppers
informed by original research, executives should pause and ask
themselves: Is our long-range strategy still valid? What aspects of
our plan should be modified? Do we have the right portfolio of
products and services to address changing market needs? Are we
structured in a way that will allow us to respond most efficiently
and effectively to market opportunities? Do we have the right
resources and capabilities to succeed?

3. Plan for the uncertain

Of course it is virtually impossible to predict with a reasonable
level of accuracy how long the recession will last and how deep the
downturn will take us. But in the face of uncertainty, executives
can (and should) model alternative scenarios and develop
contingency plans in order to create an early and shared
perspective on critical trigger points and alternative courses of
action.

Bridge Strategy Group LLC ©2009

 The Great Consumer Reset |6

4. Define the meaning of and the role for innovation

Empirical evidence shows that recessions are a great time to make
customer-centric investments, particularly in innovation. In fact,
many lasting product and service innovations happened during
recessionary times (see sidebar). Companies should think beyond
product innovation and the role of partnerships and external
networks in creating value-added differentiation by investing
aggressively and smartly in areas where others may be cutting
back.

Many lasting product and service innovations happened during recessionary times
“There’s evidence that there
will be some good values
• Snickers bar
coming free within the next • Birds Eye frozen food

year or two […] We have a 1929-1933 • Montgomery Ward – Shop by phone

• Miracle Whip – low cost mayonnaise
• Fortune magazine
balance sheet and we’re not
afraid to use it.”
• Stove Top dressing
• McDonalds Quarter Pounder
Doug Conant 1973-1975 • Starbucks
• IRA’s and discount brokers
CEO • People magazine
Campbell Soup Co.
February 19, 2009
• Generic brands
• Diet Coke
1980-1982 • Loyalty Marketing – American Airlines
• IBM PC into the office
• CNN, Cinemax, Weather Channel

So urce: AdvertisingAge, “Downtime Opportunity”, December 2008

5. Leverage the power of your balance sheet strategically and

opportunistically
Finally, organizations with the right vision and sense of direction
can make strategic and opportunistic investments, taking
advantage of depreciated asset values in order to obtain greater
scale, increase market coverage, diversify their portfolio, and/or
acquire valuable assets and capabilities.

The economic downturn has certainly created a challenging and

potentially long term environment for consumer product companies.
But for many executives this is also an opportune time to recalibrate
their brands and product assortment to capture the attention of the
post-recession consumer.

Bridge Strategy Group LLC ©2009

 The Great Consumer Reset |7

Bridge Strategy Group is an experience-led general management consultancy

committed to helping our clients rapidly improve their business performance.

For more information, please contact us at 312-357-6740 or visit us at: www.bridgestrategy.com

Bridge Strategy Group LLC ©2009