CHAPTER FOURTEEN
Why Consumers Aren’t Behaving
EVERY BODY KNOWS HOW THE CONSUMER ought to behave, except the consumer.
Everybody knows, for instance, that the first thing consumers cut back, at the slightest hint of economic trouble, is eating out. We have now (i.e., in 1976) been through two, if not three, years of fairly serious economic turbulence—whether you call it a “severe recession” or a “mild depression.” Yet consumer buying of prepared meals, in the form of restaurant meals, at such convenience food stores as McDonald’s or Kentucky Fried Chicken, or in the form of fully prepared dinners ready to be heated and served, has been going straight up. In fact, a good many people in the food business predict that by 1985 every other meal consumed in this country, including breakfast, will be bought as a fully prepared meal, to be consumed in a restaurant, in a drive-in, or at home.
Similarly, everybody knows that in a recession the demand for expensive and big houses drops sharply while the demand for small houses goes up sharply. But when the housing industry, responding to this, introduced what it called “basic houses,” that is houses at a relatively low price and about as well equipped as standard houses were in the mid-fifties, nobody wanted them.
Very much the same thing has been happening to cars. For fifty years GM has called every marketing turn in the automobile market—but not this time. This time GM anticipated that buyers would shift to smaller cars—the only rational expectation in view of the sharp drop in employment and income, and considering the parallel very sharp increase in the operating cost of an automobile as a result of the jump in gasoline prices. But the public buys big cars. The “hot car” of this year (i.e., 1976) is a new “moderately priced” $15,000 Cadillac.
Business travel on scheduled airlines flights did indeed go down very sharply with the recession and came back directly parallel to the recovery. But air travel as a whole showed no such “proper” behavior. Chartered travel of all sorts has been going up quite steadily. It shows great price sensitivity in that fluctuations in the foreign value of the dollar directly translate themselves into changes in demand for charter-flight destinations. But total demand for package tours has been doing well all along.
These are just illustrations. Many industries that market consumer goods report similar “abnormal” behavior. There seems to be no pattern, except that the pattern we expect to see is not the dominant pattern at all. In some classes of expenditures, consumers apparently spend much less than they “should”; in others, much more; and in some, exactly what marketing theory and folklore expect them to spend.
The instances of “abnormal” consumer behavior may be pure coincidence. They can all probably be explained away. And this is the way most businessmen I know react to consumer behavior that surprises them.
One explanation that some thoughtful people in business offer is that this behavior indicates “stagflation”—that is, public response to an economy which simultaneously stagnates and suffers fairly severe inflation. One cannot dismiss this explanation out of hand. There are some indications that continual expectations of inflation play a part, perhaps even a substantial part, in the consumer’s behavior. They may explain, for instance, the tremendous boom in luxury homes or the continued appreciation in the price of topflight jewelry and of “really first-rate” art objects. The people who buy these things are the same people who traditionally bought common shares as a “hedge against inflation” and who then bought gold for the same reason.
The stagflation explanation does not, however, explain a good deal of observed behavior. It does not explain, for instance, why retail sales of standard consumer goods—the things people normally buy—have been so sluggish, especially in 1975 and 1976.
Such sales should have gone up fairly fast in a period in which people do not trust the purchasing power of money and expect prices to go up steadily. Similarly, the high savings rate of 1975–76 was hardly compatible with stagflation; nor was the influx of money into savings institutions, even though interest rates were then falling.
An alternative explanation, therefore, needs to be considered: The American consumer market is undergoing a new segmentation. There is evidence for this. In effect, three groups are emerging as dominant market forces. The traditional marketing theory does not take them into account and they behave differently from the standard model, if only because their economic reality is quite different.
The first of these groups is older people, especially people who are retired. In percentages, this is the most rapidly growing group in the American population. It now comprises some 30 million people—as against 94 million people in the work force. In another few years it will have grown to 40 million people, while the work force will have grown to only 100 million people.
The retired people are not much affected by unemployment. They are protected to a fair extent against inflation with Social Security and, increasingly, private pension plans escalating to keep in step with inflation and the cost of living. Contrary to general belief, the older people aren’t all poor and don’t all have low incomes.
As a result, retirees are not just customers for hearing aids or wheelchairs. They are, first of all, customers for such things as the leisurely vacation, for they have plenty of time. They are customers for recreation vehicles. And they are very heavy customers for prepared food, in part because going out to the fried-chicken parlor is one way to break the monotony of an idle day. Maybe 10 million to 15 million of the 30 million in the older population today are poor, or at least have low incomes. But this leaves another 15 million who are “affluent” without being rich. And tomorrow, when there will be 40 million of the older people, the affluent consumer group among them is likely to be 25 million people or so—and this is a large market segment indeed.
The second such new group may be the young adults. In actual numbers they are growing faster than retirees, though they are growing somewhat less fast in percentages. Fifty percent or so of these young adults—that is of the people who are now entering the labor force in large numbers—have sat in class rooms beyond high school. One hears a great many scare stories about the Ph.D. who cannot find a job and drives a cab. But actually, the highly schooled among the young adults have a low unemployment rate and very high incomes. Starting salaries for young adults have not gone down at all, despite the tremendous number who are being graduated.
This group appears to be heavily influenced by inflationary expectations. Their savings rate is low and as buyers they are shifting strongly toward the “big ticket” item. For example, they buy expensive homes, considering their incomes. They take expensive skiing trips. They own boats.
Finally, there are the married working women, probably the most important of the “new” groups. Half of the married women in this country now hold jobs. It’s also in this group that the greatest additional growth in jobholders and earnings is likely to occur; it is the only group in which there is a sizable reservoir of employable people.
The husband is still considered the breadwinner, and his income is used for normal household expenses. The wife’s income averages about 60 percent of the husband’s and is used for “extras.” Her money provides the margin for a bigger house, the luxury car, the expensive vacation. But the household spending pattern, based on the husband’s income, remains sensitive to consumer confidence and to expectations about job security and income. The general budget of the two-breadwinner family isn’t greatly affected by the wife’s earnings, which are considered “extraordinary” earnings and are used for “extraordinary” purchases.
Twice since World War I there have been profound changes in the American marketplace. In the early 1920s, the American mass market emerged; Alfred Sloan was among the first to understand this, and he built General Motors on market segmentation by income groups. Then, about 1950, there emerged a market segmented by “life-style”; such things as education, age and number of children, and location of home became as important as, and perhaps more important than, income in determining consumer patterns.
Now we may be witnessing a new segmentation by population dynamics. The older person, the young adult, the mature married female worker may all emerge as distinct consumer segments that will cause marketing men to rewrite their rules of how consumers ought to behave. Such groups behave “rationally.” But what for one market segment is rational—i.e., makes the most of its economic conditions—makes little sense for the other group.
It’s risky, of course, to predict structural economic changes in American society. It’s perfectly possible that the puzzling consumer behavior of the last few years will in another few years be seen as nothing but minor and irrelevant coincidences. But there is also a possibility that something fundamental is happening to consumer behavior. At the very least, it bears careful watching.
(1976)