Consumers need to increase their purchasing power and this requires the certainty that their wages will always be paid. It is not so easy according to economists.
What will it take to boost household consumption? After two months of low profits, the ministry announces that in July sales of goods and services (including catering) fell by 0.1% compared to the previous month and by 8.3% compared to July 2008. Apart from car sales (up 2.4% thanks to the scrappage bonus), retail sales are down 0.6%. These figures worry economists who were hoping for profits of 0.6% in July.
Consumers have been tightening their belts to the max for over a year now. Their purchasing power has largely declined with the rise in unemployment and precarious jobs, added to this uncertainty and stress, they have lost all motivation to buy. Discretionary spending has collapsed. For merchants this means that their income has fallen as their customers turn to discount stores. As a result, they are forced to reduce their offer.
Boosting household consumption, which accounts for more than two-thirds of the US economy, is seen as the key to a winning return to growth. Only problem but size, “households do not have the heart to spend” explains Paul Dales, economist at Capital Economic.
As restriction becomes the new norm among customers, merchants are looking for ways and means to encourage their customers to put their hands in their pockets. “The first reaction of traders is to lower prices to stimulate sales,” explains Raymond Burke, professor of marketing at Indiana University’s Kelley School of Business. “The problem is that consumers are starting to get used to these new prices, which will affect the profitability of these companies in the future.”
By studying consumer behavior, Burke identified various elements that could transform consumers’ needs and desires into acts of purchase. The most important thing for traders is to “ensure that they have consumer needs in stock at a reasonable price. They must therefore understand the consumer and provide them with almost tailor-made goods”.
Burke cites the big box giant Kroger as an example. In partnership with a British study center, the Cincinnati company gathers information on consumer preferences through their loyalty cards. She then sends them letters with personalized discounts. Thanks to the success of its own products, Kroger announced profits reaching 435 million dollars for the first quarter of 2009 alone, an increase of 13%.
However, economists do not see consumers returning to their old purchasing behavior until they are certain of their future and with money in their pockets. Deloitte, which uses a consumer spending index to track capital flows, proposes lowering taxes, improving wages and stabilizing house prices to boost consumers’ purchasing power. These factors, once improved, combined with the increase in household confidence “would be likely to revive demand in the months to come” according to Stacy Janiak, vice-president of Deloitte in her report of August 12th.
Mr Dales of Capital Economic explains: “Unemployment must stop rising, wages must continue to rise and household confidence must rise again. Unfortunately none of this will happen any time soon”. By early next year, Dales hopes the economy will be a little better.
Meanwhile, the change in consumer mentality should force retailers to get used to small turnovers. Also according to Dales, the massive expansion of businesses over the last ten years has been “fed” by credit facilities. “Banks may be doing better than they were about six months to a year ago, but they will be less inclined to lend in the same way as five or ten years ago,” he adds.
