Consumers have been transformed, but not by the recession. The metamorphosis, which started long before the economic downturn, will prevail regardless of what Congress, The Fed, or Europe does. Here’s what everyone from Proctor & Gamble (PG) to Neiman-Marcus needs to know about the most dramatic and important shifts in American values since the mid-century flight to suburbia.
The most recent economic collapse and subsequent slow to-no recovery has had significant impact on consumption, with consumer behaviors varying widely by demographic and income segments.
However, major shifts in what consumers need, desire, demand and expect have been taking place since long before the Great Recession.
While the economic downturn may be accelerating some of these changes, it did not cause them. Rather, a major cultural evolution and a total reassessment of value and values are responsible for the most dramatic changes in what consumers are demanding today. Essentially, this re-examination of cultural lifestyles and consumption behavior finds consumers elevating their desires to levels best characterized by “self-actualization,” or the pinnacle level of Maslow’s “Hierarchy of Needs.” The theory, first published in the early Forties but increasingly accepted today, postulates that as each level of a person’s needs becomes fulfilled, he moves up to the next level to seek to satisfy a “higher level” need. Once basic physiological needs are satisfied, like food and shelter, safety must be satisfied, followed by social needs like love and belonging, then esteem, and finally, self-actualization, or fulfilling one’s individual potential.
Of course, none of this shifting would be happening if we had not become “the land of plenty” and plenty more, as we were fulfilling the old American dream of acquiring land, social status and things. And, the piling on of more stuff than people need, unlimited and instantaneous access was made increasingly possible through technology, the Internet and globalization. And we took on debt to help further the dream.
The end result: an economy transformed from value creation, to value consumption, which now totals 70% of GDP, and a consumer omnipotent enough to change our culture, our lifestyles and our world.
Don’t Just Fulfill My Needs: Satisfy My Dreams
A fundamental shift is changing how consumers are now seeking and defining happiness and satisfaction. Recent studies have found that there is little positive correlation between the increase of wealth and increased happiness. In the United States, a 2002 study by Ed Diener and Robert Biswas-Diener entitled Social Indicators found that once household income reaches $50,000, happiness levels tend to plateau, even compared to households with an income of over $90,000, suggested consumers become sated with, and perhaps even turned off by, “stuff.”
The same holds true in other developed countries. In Japan, for example, there was a fivefold increase between 1958 and 1987 in real income, but no increase in average self-reported “happiness.” Another study ranked countries by how happy their people are, and Denmark, despite soaring income tax rates and lack of wealth, was rated the happiest country in the world.
There is growing evidence that while increased wealth may lead to increased purchasing, it does not buy happiness or satisfaction, and may explain why spending on experiential categories like travel, entertainment, and discretionary services has outpaced that of many consumer goods.
As consumers seek higher states of well-being, and a new American dream similar to Maslow’s “self-actualization,” there have been five major consumer value shifts.
1. From Needing Stuff to Demanding Experiences
The classic “game-changer,” was “from Maxwell House in a can to Starbucks.” Another more current example would be from choosing to buy a computer off of a shelf in Comp USA, to tripping over oneself to get to the Apple experience.
With so many closets, kitchens and garages full of stuff, the appetite to keep buying more is falling dramatically. A study conducted at Cornell University measured the comparative satisfaction of material versus experiential purchases over time, and found that the level of satisfaction drops dramatically for material purchases and increases for experiential purchases.
Another reason consumers choose experiences over stuff is that the experience is co-created by provider and consumer, often making its perceived value much higher than its price. Abercrombie & Fitch (ANF) provides the environment of a “cool, sexy” shopping experience, and Lululemon (LULU) provides yoga classes. However, the consumers, at the moment they are in the environment, are reacting and shaping that experience to themselves, to their individual mood of the moment. Each time they return to the Starbucks (SBUX), Apple (AAPL), A&F or Lululemon experience, it will be new, unique and different, which remains a powerful motivator and further elevates the value of the experience.
Conversely, the price of mere goods is most often intrinsic to their physical value. The purchase selection from among a lot of stuff can be evaluated on the basis of physical and common criteria, including price. Comparison shopping for goods is easier than ever today. However, co-created unique experiences cannot be compared, making them more anticipatory and exciting, and worth more. Consumers will also spend twice as much time enjoying the experience, and thus will likely spend more.
Other examples are: online flash sales sites Gilt Groupe and Ideeli, which have developed cult-like, addicted followings; the fresh, fun, friendly food emporiums Whole Foods (WFM) and Trader Joe’s; and the preference for buying a fishing rod at Cabela’s (CAB), a world of sporting goods experiences with free fly-fishing lessons, a two-story indoor mountain climb, waterfalls, and trout ponds.
Consumers are also expecting some level of experience from wholesale consumer brands and services of all types, simply because they can. This is driving wholesale brands such as VF Corporation’s (VFC) The North Face, Ralph Lauren (RL), Apple (AAPL), Microsoft (MSFT), Proctor & Gamble’s (PG) Tide and Mr. Clean brands, and many others to roll out their own branded retail stores, like the always-packed three-story M&M’s World in New York’s Times Square, so they can better provide these experiences. They get to their consumers directly and more quickly, and because they own and control the point of sale, they control the presentation and the whole brand experience, from imaging to music to events — essentially the brand’s entire DNA. This is an enormous and sustainable competitive advantage when compared with being jammed into a departmentalized retail environment, where the retailer will have “cherry-picked” items from the brand’s line and presented it to consumers stuffed on racks and shelves.
So, not only do these co-created experiences compel consumers to want to return to them more often, becoming addicted so to speak, they also elevate the value of the “store” and everything in it. And great experiences provide great pricing power.
2. From Conformity to Customization
Consumers are moving away from desiring mass-marketed megabrands, meant to be a shared identity with fellow consumers. During the middle of the last century, when there were fewer brands to select from, national brands were important. Consumers felt they were part of the in crowd if they wore the same logo as their friends and peer groups. Consumers still want what’s cool, but the definition of cool is now more individual. Today, as new brands proliferate on a daily basis, targeting specific consumer niches, consumers are shunning the need to be included, and are instead pursuing exclusivity.
One catalyst for this shift, of course, is easy access to information and knowledge about all products and services. So consumers now want something special, even customized, for their own particular desires, real or perceived. In fact, brands like the Gap (GPS) and Starbucks (SBUX), which originally grew quickly in response to seemingly limitless markets, discovered that having a store on every corner, so to speak, was a major factor in their decline and are now attempting to become less ubiquitous. The brand that’s available to anybody can quickly become undesirable to everybody, as consumers seek exclusivity.
Leading fashion trend forecaster David Wolfe of the Doneger Group describes the new consumer landscape this way: “It’s bye-bye mainstream and hello to thousands of tiny consumer tribes.” These tribes, in pursuit of special, exclusive value, are driving major changes in all consumer-facing businesses. The structure of the marketplace will be redefined as an infinite number of finite market segments (“communities”) being served by an infinite number of finite brands, micro-marketed through mediums that specifically target those niches.
Many of the branded apparel specialty retailers understand this consumer shift. Accordingly, they are spinning off segmented niche brands, growing their original brand by extending it into other product and consumer markets. Examples include J. Crew, spinning off the Crewcuts kids brand and comfy casual Madewell. Urban Outfitters (URBN) gave birth to Anthropologie and Free People. Each targets a different consumer segment, providing an eclectic mix of apparel and selected hard goods. Limited Brands’ (LTD) Victoria’s Secret, the intimate apparel powerhouse, launched the wildly successful PINK in order to attract a much younger customer.
The shift toward exclusive niches also favors lifestyle brands such as Ralph Lauren (RL), or Nike (NKE), or VF Corporation’s (VFC) The North Face, and others, which are not linked to a single product or classification of products, or to one consumer segment. They can therefore launch into any consumer or product segment that is compatible with their brand positioning. The brands that were launched and heavily marketed as single-product mega-brands, such as Levi’s jeans, have found it extremely difficult, if not impossible, to extend their brands into other product or consumer markets. Furthermore, consumers, with their closets overstuffed with all kinds of brands, will tend to try a brand that isn’t being worn by everybody else, rather than choosing yet another one of the ubiquitous mega-brands. After all, in 1980, they had a choice of about six major blue jean brands. Today there are hundreds.
Retailers from traditional department stores to hardcore discounters are being forced to meet the expectations of the exclusivity-seeking consumer. Accordingly, they are accelerating their pursuit of exclusivity agreements with designers and national wholesale brands as well as their private branding programs. And, all of them are pursuing, in varying stages, “localization” – type programs, again to cater to special, local consumer preferences.
3. From Plutocracy to Democracy
Armed with their reassessment of value, consumers have shifted from accepting the notion that only the wealthy deserve luxury to demanding “democracy” — affordable luxury for all classes. This shift helped create a new consumer segment, “luxury aspirants,” and drove the launch of many brands to cater to the up-market “yuppie” core of that segment. Brands such as Coach (COH), Lacoste, Bloomingdale’s (division of Macy’s – M), Dooney & Burke, Tori Burch and others have successfully captured the contemporary, young, not-quite-rich but well off luxury consumer.
Further down-market, the democratization of luxury is driven by designers creating diffusion sub-brands for mainstream retailers. Continuing a trend begun by Halston thirty years ago, Jean Paul Gaultier has designed for Target (TGT), Norma Kamali can be found at Walmart (WMT), Vera Wang at Kohl’s (KSS), and Nicole Miller at JC Penney (JCP). Stella McCartney has done a line for GapKids (GPS). The impetus for this is not only consumers seeking higher quality value for their money, but the designers’ need for growth in over-competed, slow-growing markets. As consumers have increased access to information through their mobile electronic devices, or PCs, they can compare prices in a matter of seconds and can better assess real price /value relationships. So, blind acceptance of any price tag on a luxury item, just to be able to flaunt a flashy item and logo among one’s wealthy peer group, is giving way to a growing demand for real value and quality.
4. From Just New to New and Now
New no longer trumps all. Consumers still want new, but they also expect to have it right here, right now. Innovation itself is not enough to win in a 24/7 world, where what’s created today is cloned tomorrow. It’s now necessary to knock yourself off every day of the week.
A good example of the shift to “new and now” is Zara, a division of Arteixo, Spain-based Inditex, and part of the “fast fashion club” which includes H&M, Forever 21, and others who are racing to adopt its model. With over two thousand stores around the world. Zara offers both supply-chain and product innovation by delivering two new lines every week to each of its stores. In what is probably a first in the industry, the line mix may be different for two different stores just a few blocks apart, based on the consumer preferences of each. Zara’s average core consumer annual visitation rate is seventeen, compared to a retail industry average of about four, simply because Zara fans are compelled to see the twice-weekly new lines. They are also compelled to buy something right away if they like it, knowing it might not be there the following week.
Costco (COST) often has a “treasure hunt” component in the middle of the store to offer a “new and now” experience with interesting, selective and often not-repeated merchandise. Trader Joe’s does the same thing by often changing and replacing top-selling items. The Gilt Group online membership club utilizes the same principle. It offers limited quantities of new and exclusive luxury merchandise in the form of membership only sales every thirty-six hours, which has members rushing to their computers every day so as not to miss the sales.
5. From Self to Community
Consumers are in the middle of a total reassessment of value and values. Me is giving way to we. Less is now more. Quality is beginning to win over quantity, and community, friends, family and lifestyle are replacing stuff.
One of the more positive results of accessible abundance is that many more consumers are now able to achieve a kind of self-actualization in which their material desires are being satisfied and they are able to move toward maximizing their human potential: to seek knowledge, inner peace, and aesthetic. Logically, this shift includes heightened interest in community over self.
One major manifestation of this shift, as well as one of its ongoing enablers, is the phenomenal growth of social networks. While these rapidly populating worldwide “communities” are the commercial targets of many retailers and consumer product companies, they are finding that traditional marketing tactics do not work with them. Marketers must be given permission to enter these communities, and they are not going to be allowed to sell in the classic way. Businesses must shift from talking to, or talking at, to conversing with he consumer.
New Internet retail clubs like Net-A-Porter are communities with millions of members, which happen to also sell product. There are plenty of ways to create a community environment offline, too, as many craft stores, like Michael’s, and Sporting Goods stores like Golfsmith (GOLF) are doing: offering training classes, events and shows, all of which makes members feel part of a broader community. This shift toward self-actualization has an altruistic element to it as well. The consumption binge of the last quarter century reached epic proportions, and then crashed early in the new millennium. This experience fed into the realization among consumers that money doesn’t buy happiness and that “less is more,” even among the wealthy. Concurrent with the shift from plutocracy to democracy, ostentation has given way to understatement.
Furthermore, consumers are finding satisfaction in taking up causes, such as environmental advocacy and charity work. The remarkable strength of this trend is driving businesses to attach their commercial efforts to these same causes. Walmart (WMT) is a great example of leading “sustainability” initiatives in the retail and consumer product industries: reducing the toxic emissions of their huge trucking fleet; selling only incandescent light bulbs; forcing its vendors to reduce the volume of their packaging; and much more. The day after the devastating earthquake in Haiti in 2010, the high-end online fashion club Rue La La suspended its daily online sale and instead directed its members to the Red Cross website, suggesting they divert their planned Rue La La spending to the Haiti cause.
On the other hand, the giant Nestlé Company was blindsided by environmental activists using social media to attack them for their purchases of palm oil, an ingredient in Kit Kat candy bars, from an Indonesian company that, according to Greenpeace International, has cleared endangered rainforest land to plant palm trees. Protestors posted a negative video on YouTube, deluged Nestlé’s Facebook page and Tweeted claims that Nestlé is contributing to the destruction of Indonesia’s rain forest, potentially exacerbating global warming and endangering orangutans.
So, just as those who do the right environmental thing will attract and even convert consumers, those who don’t are at great risk of suffering public relations disasters and losing business.
It’s Time To Change The Game
The winning businesses of the future will understand and respond to this overriding cultural and lifestyle transformation that is taking place, and along with it, the five major shifts in what consumers desire today. The retailers and brands that become compelling communities generating ideas, causes and/or other altruistic concepts, and where one can have an exhilarating, unique experience, as opposed to just buy stuff, will not only achieve great success, but they will have “changed the game,” by creating a 21st Century sustainable, new paradigm.