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Continued: A new consumer

  • Article by: JACKIE CROSBY•JCROSBY@STARTRIBUNE.COM
  • Last update: January 27, 2010 - 3:04 PM
Chad and Kari Herrgott are on the front lines of the nation's tentative steps to get the economy humming again. With two young children (and two dogs), they're in their prime consuming years -- feeding and clothing a growing family, buying and furnishing homes, trading up to family-sized cars. Last week, after their vacuum cleaner sucked its last bit of dust, the Shakopee couple came looking for a replacement at the Warners' Stellian appliance store in Edina. The verdict: A slightly scuffed-up Miele floor model they bought for $250 less than the $699 price tag. "This is an extravagance for us," said Kari Herrgott, as 3-year-old Hailey vied for attention and Holton, 11 months, pounded the canister with a toddler's glee. "But with little ones on the floor, I'm vacuuming every other day. I want something that's going to work well and be durable."

Young families like the Herrgotts have long provided the fuel for the nation's economy. But in previous downturns, the 78 million baby boomers were in charge. Now, boomers are getting older and holding fast to their cash.

The Herrgotts and their 49 million strong Generation X cohorts are both fewer in number and less affluent than boomers. Combine those basic demographic trends with a consumer who's settling into a more thrifty mindset, and the nation is primed for a slower and longer recovery this time around, economists say.

"Boomers aren't going to lead us out of this one," said Mandy Putnam, vice president and manager of Retail Forward's ShopperScape consumer surveys.

"The last two recessions hit boomers at life stages where they were younger and more able to recoup their losses," she said. "This one has hit them in their 401(k)s, their housing values -- all of what they thought was their accumulated wealth has taken a beating. So even affluent boomers have pulled back considerably more than their younger cohorts."

Minnesota's demographic landscape generally lines up with the national average. In the recession of the early 1980s, which also was deep and long, about 47 percent of the state's households were headed by people between the ages of 20 and 40. Now, about 37 percent are in that age bracket, a 10 percent drop.

"As a society and as a state, we're getting older," said state economist Tom Stinson. "The percentage of households in the 'big spending' years, compared to the save-for-retirement years, has changed. Other things being equal, we're going to see natural weaker spending growth, no matter what the economic conditions."

Shifting demographics also mean big challenges ahead for retailers, which have ridden the gravy train of easy growth for three decades, argues Doug Anderson, senior vice president of research and development with the Nielsen Co.

Traditionally, marketers haven't done a good job of reaching older and ethnic customers, Anderson said. But those "who assume that the baby boom will start to behave like the current older Americans, just because they reach the age of 65, do so at their own peril," he warned in a December report.

Immigrants are fueling most of the population growth. In 15 years, the majority of families with children will be nonwhite.

Birth rates, which have been falling since the peak of the baby boom in 1957, mean households are shrinking, too. In the next decade, middle and upper-middle classes will shrink the most of any demographic group, according to Nielsen Co., and spending on consumer basics will begin to fall dramatically in constant dollars.

Price 'almost always' an issue

That may not portend the decline of sprawling super stores, but it will mean a much more competitive marketplace as retailers vie for shrinking consumer dollars. Walgreens, which recently announced it will start selling fresh food, may be part of the early wave.

"When things were really good -- say in 2006 and 2007 -- people didn't ask about prices much," said Angela Warner, a saleswoman at Warners' Stellian, the St. Paul-based chain her family owns. "Now it's almost always an issue."

In the days of easy credit and unsustainable home equity loans, consumers bought dishwashers for the bar or a second one for the kitchen, Warner said. In a sign of the changing times, the Edina store last week was scaling down a high-end Viking kitchen display that had come complete with a 48-inch professional-quality range.

"Viking has been well known as a high-end appliance brand, but they're creating a lower price point," Warner said. "It still means something to people. People still want to feel like they have the quality and status, but they don't necessarily have the income or the budget to allow for it anymore."

The more frugal mindset

Marketing consultant Pamela Danziger said this is the new reality for the 21 million households who earn between $100,000 and $249,999 who no longer are trading up to luxury products and living beyond their means.

"People now are asking, 'Do I need this?' We really stopped asking this question before," said Danziger, whose firm Unity Marketing specializes in the luxury market. "The justification was, 'I see it, I want it, I'm buying it.' Today, they're also asking: 'If I need it, can I find it cheaper somewhere else?' "

In the years ahead, the biggest change in the high-end market will be a clear-cut dividing line between those with household incomes of $250,000 and those aspirational consumers below it.

"Some of the brands are going to have a hard time adjusting to the more frugal mindset," she said.

Many retailers already are adjusting to a value-conscious consumer. Macy's Inc. said last week it will open four Bloomingdale outlet stores this year (none in Minnesota), as part of a new store concept. Nordstrom is only opening its value-priced Nordstrom Racks this year. Minneapolis-based Target Corp. will sink $1 billion into refurbishing existing stores in 2010 and build just 10 new ones.

In 2010, many retail watchers predict consumers will begin buying small-ticket discretionary items, and that pent-up demand may spark some to spend on indulgences.

Meanwhile, the Herrgotts say they'll continue pinching pennies even as they replace worn-out appliances and dream of refinishing their basement someday.

Chad Herrgott, 39, a self-employed technology consultant, figures the household saves about $80 a month just by clipping coupons.

Kari, 33, adds, "We've always been savers. The economy has just made it more so."

Jackie Crosby • 612-673-7335

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