The Rationing of America

Posted by blonde
on September 19th, 2011

Sleeping baby

Consumer prices rose more than expected to .4% and coupled with disappointing August retail sales, there are some trends in consumer behavior that are popping up on my radar: Rationing Purchases. I’ve spoken about the bi-furcated market at retail for over a year now, in that luxury stocks like $BRBY, $BULG $RMS, $TIF are faring extremely well, and discount & dollar stores are thriving on the low end. Now, we are witnessing this play out not only in stock performance, but in consumer behavior and buying decisions. The middle class is vanishing before our eyes, and while we all know the economy is on life-support, so is the US consumer. No one is telling this story. U.S. consumers are finding new and inventive ways to stretch the dollar. We are witnessing the RATIONING OF AMERICA. You can link to the video segment with Fox News Channel’s Neil Cavuto here: http://public.media.foxnews.com/091911/091511YWBENTZ-46OWH0IA_WMPG4.mp4

**Americans rationing diaper use
**Even fast food sales are down – $MCD McDonald’s doesn’t reach earnings prediction

**As gas prices soar, scooter and bike sales have spiked.
**Since 2006 u.s. pantries have been slashed by more than 8%.
**Over two thirds are purchasing more generic brands; two in five brown-bag lunch and re-use water bottles

Recent figures from the United States Department of Agriculture (USDA) and analyses from economists indicate that food inflation this year may surpass initial expectations. Commodity costs are high, and, after absorbing cost increases earlier in the downturn, many major CPG companies are now passing these increases along to the consumer in the form of higher prices.

Coca-Cola, $KO $CCE for instance, announced plans to raise its prices 3-4% percent in the second half of this year, following prices increases of 1 to 2% in the first half.

Kroger $KR has recently re-examined its inflation estimates, predicting that prices may rise 3-4% for this year, rather than the 1-2% percent initially forecast.
Procter & Gamble $PG executives said a shrinking middle class is prompting them to focus more on high- and low-end products, “where a lot of the growth is happening.” The company recently introduced bargain-priced Gain dish soap. Other companies, including H.J. Heinz $HNZ, also are betting that the shopping public is dividing into high and low, The Wall Street Journal reported (9/12/11).

Even before the economy took a turn for the worse, U.S. pantries were shrinking. Since 2006, the pantry has been slashed by more than 8%.
Between 2006 and 2008, the average number of SKUs in a household pantry fell 3%. Then came the economic downturn, which is undoubtedly contributing to further pantry-trimming efforts. In the CPG Industry this is known as DESHELVING, where consumers essentially keep their pantries lean and mean, with the basic necessities.

Bottom Line:

The US Consumer is definitely in the midst of a longer term behavior shift toward more rationing, and more savings. The weekly shopping behavior is indicative of reduced spending on food, and consolidation in the retail grocery market. Case in point: the recent bankruptcy filing of Food Emporium Inc. and rise in popularity of Wal-Mart $WMT as a grocery store. I believe this situation will go from bad to worse as we enter the back half of the year. This era’s inflation is rising on non-discretionary prices in a no wage growth economy. The rise acts like a stealth tax increase that benefits few including the government. Did easy money help? Moreover, The Unemployment rate is probably understated since the civilian participation rate and employment-population ratio are back to levels from the early 1980s and 1970s. Economists have estimated that if the participation rate were back to 66%, the unemployment rate would be over 11.5%. OUCH. Thus, more Americans are/will rationing because of rising costs/flat incomes. A poor economic outlook = high unemployment and low GDP growth, add generally restrictive government policies and lack of confidence and BAM: you’ve got a stagnate economy and a beat down consumer.

***RESEARCH and ANALYSIS BELOW****

A worldwide study on how often babies’ diapers were changed per day provided some interesting data; India came in at 10x, US came in at 6x. Also, sales of diaper ointment have spiked in the US. So, what that tells me is that the US consumer is in the midst of “rationing” at the CPG (Consumer Packaged Goods) level. Extremely telling since usually parents will sacrifice ANYTHING else before denying a baby’s basic needs. (see link: http://adage.com/article/news/economy-s-latest-casualty-america-s-baby-bottoms/229619/).

Given the shift among upper end individuals to delay or decide against childbirth, the skew on those who have kids toward lower end of income spectrum has likely not been captured properly by macro data, which is why I find the survey on rationing diapers and increase in use of ointment quite interesting. The lower down the income ladder, the more one is likey to have kids and experience unemployment and underemployment. Under those conditions, the rationing is perfectly, well, rational.

Geek alert: Research below for your viewing pleasure.

Polls on How Americans Are Saving Money
Harris Interactive
July 6, 2011
Americans Cutting Back on Everyday Expenses to Save Money Over two thirds are purchasing more generic brands; two in five brown-bag lunch and re-use water bottleshttp://www.harrisinteractive.com/NewsRoom/HarrisPolls/tabid/447/mid/1508/articleId/830/ctl/ReadCustom%20Default/Default.aspx
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Smart Money
Jun 25, 2011
Americans Taking Shorter, Cheaper Vacations http://blogs.smartmoney.com/paydirt/2011/07/25/americans-taking-shorter-cheaper-vacations/
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USA Today
May 9, 2011
Bike, scooter sales pick up speed
As gas prices surge beyond $4 a gallon, more Americans are cycling as a way to stay fit, save money, or both.
[source: FULL ARTICLE HERE - http://www.usatoday.com/money/economy/2011-05-09-scooter-bike-sales-boom_n.htm]
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Harris Group w/ Deloitte
2010
The 2010 American Pantry Study
http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/Consumer%20Business/US_CP_American%20Pantry%20Study_Executive%20Summary_2010.pdf

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