THE ECONOMIC DIVIDE: HOW CONSUMER BEHAVIOR DIFFERS ACROSS THE ECONOMIC SPECTRUM

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1 THE ECONOMIC DIVIDE: HOW CONSUMER BEHAVIOR DIFFERS ACROSS THE ECONOMIC SPECTRUM SEPTEMBER, 2012

2 The Economic Divide: How Consumer Behavior Differs Across the Economic Spectrum Jeff Gregori, Vice President, Consumer and Shopper Analytics-Retail US Peter Katsingris, Vice President, Industry Insights, Media and Advertising Analytics Overview Concerns over the U.S. economy remain in the forefront for many consumers with a lackluster recovery at a pace best described as slow but steady. Improvements on the economic front elevated U.S. consumer confidence to its highest level (92) in five years at the beginning of the year but have since declined by five points (87) in June. Consumers continue to be pessimistic about job prospects and are concerned that the economy is stalling again. Economic conditions have yet to return to pre-recession levels and are impacting various consumer segments differently. Economic forces have bi-furcated the great middle class that emerged following World War II, driving a wedge between the haves and have-nots. Consumers at the poles of the economy are experiencing different economic conditions, altering consumer behaviors and shifting consumer needs. The most affluent segment has exited the recession and re-established a level of financial equilibrium. Meanwhile the lower income segment, the hardest hit financially, continues to feel vulnerable and spend less. Today, these households collective buying power respresents 24% of consumer packaged goods (CPG) purchases. Over the next ten years, more people are going to be moving into the lower income group, which is expected to grow twice as fast as total households. As the economy remains sluggish, understanding consumers across the economic spectrum has become increasingly important as some of their behaviors in response to the recession have become more permanent. Consumers continue to rebalance their family budget staying pragmatic and value conscious, creating a new norm of purchasing behavior, turning channel proliferation, new media opportunities and promotional offers to their advantage. 2 Copyright 2012 The Nielsen Company.

3 Highlights To better understand consumers across the economic spectrum, Nielsen conducted an analysis of media usage and purchasing behaviors. Key findings revealed that media consumption patterns and delivery platforms vary dramatically across income levels; however CPG shopping behaviors are not as different as one might expect. Media Usage Reaching consumers at the economic polarities requires an understanding of their media usage and adjusting marketing strategies accordingly. Income levels influence what media people purchase and how they access content. While more income corresponds to access to more devices and platforms, economically-strapped consumers generally consume more media. With multiple media platforms, higher income consumers pose a challenge as to the best device(s) on which to reach them. Their media usage is quickly shifting through the rapid change in technology. Use of connected devices such as tablets and smartphones supplement traditional television and online usage. Higher income consumers own more digital video recorders, video game consoles, smartphones and tablet devices than any other income groups, however penetration of these devices is rapidly growing across all other segments. These devices are changing consumer behavior, leading to more anytime, anywhere consumption of media. Higher income consumers are twice more likely to subscribe to premium cable packages and five times as likely to access television content via paid telecommunications services than lower income consumers, resulting in a multitude of choices available to the higher income group. While higher income consumers are distinguished in their access to various devices and media types, lower income consumers are distinguished in their consumption of the media they do have access to, including digital media. Lower income consumers exhibit a huge appetite for media, logging almost 15 more daytime TV hours than middle income consumers and about 25 more hours than higher income consumers. Lower income consumers heavy media usage goes well beyond TV. They spend more time online than their more affluent counterparts, almost 6 hours more per month. Additionally, they stream video in greater amounts and use social networks more often. Facebook emerged as the most popular mobile application with very little difference between the usage of mobile social networking across all income groups. Purchasing Behaviors One might expect that purchasing patterns across income groups would be very, very different. Our analysis shows that while there are differences between the groups, there are important similarities that must be understood if these groups are to be reached and marketed to successfully. For instance, branded products make up a fairly similar fraction of purchasing for both upper and lower income groups. Consistent with this, share of private label products are more similar than different across income groups in most product categories. Also, although there are some differences in the retail channel choice across income groups, the fact is that grocery and mass merchandisers are the dominant channels, to similar degrees at both ends of the income spectrum. Having said this, there are some differences between the groups that are important to note. First, higher income consumers do spend more in total. They tend to do this not by shopping more often (they shop somewhat less often) but instead by spending more per shopping trip. Lower income consumers are in fact more likely to be found in certain retail channels, like dollar stores, convenience stores, and deep discounters. Upper income consumers, on the other hand, are much more likely to shop in warehouse club stores than lower income consumers. Copyright 2012 The Nielsen Company. 3

4 Discussion Although cautious consumers dialed down spending across the board, shoppers appear to feel slightly more confident on a relative basis with grocery spending improving. In 2011, more than 50 percent of shoppers claimed to reduce grocery spending. One year later, only 29 percent of shoppers made the same claim, a positive trend for retailers and manufacturers. However, nagging long term unemployment persists, affecting virtually every industry, occupation and age group. Over the next ten years we expect total households in the U.S. to grow by 8%; however, households closer to the poverty level will grow twice as fast at 17%. These lower income households represent a growth segment that will require marketers and advertisers to adjust their current strategies in response to these economic shifts and their influence on shopping behaviors. Media Device Penetration As might be expected, income levels determine what types of media delivery people are willing to purchase. Upper income consumers subscribe to more pay cable services such as premium HBO or Starz Network than lower income consumers, 46 compared to 21 percent, and five times as many telecommunications services such as AT&T U-Verse and Verizon FiOS, 16 compared to three percent. (Chart X) Pragmatic behavior will continue, but less intense in the next year ACTIONS TAKEN IN ORDER TO SAVE ON HOUSEHOLD EXPENSES DID THIS PAST YEAR WILL CONTINUE TO DO Save on gas & utilities 62% 51% Reduce out-of-home entertainment 58% 26% Spend less on clothes 56% 29% Reduce take-out meals 55% 33% Reduce grocery spend 52% 29% Use car less 39% 21% Source: Nielsen Global Consumer Confidence & Opinion Survey 1Q 12 Conversely, lower income viewers are more likely to have a cable package that doesn t involve premium channels and more likely to have broadcast only than any other income groups. Income levels also account for technology adoption patterns. Higher incomes lead to more rapid product adoption and greater device penetration. More than two-thirds of higher income consumers, 68 percent, own a digital video recorder (DVR) compared to 45 percent of the national average and 23 percent in the lower income bracket. 4 Copyright 2012 The Nielsen Company.

5 Fifty-eight percent of affluent consumers own a video game console compared to 46 percent of the national average or 34 percent of lower income consumers. The difference in viewing patterns for daytime TV by income strata is striking; persons within lower income households log a total of 41 hours 30 minutes of TV per month, taking in 15 more hours of daytime TV than middle income consumers and 25 more hours of daytime TV than higher income viewers per month. TV Views The average American devotes 151 hours and 58 minutes to TV viewing each month. Persons in lower income households watch more television (192 hours and 48 minutes per month) than consumers in middle income (148 hours and 49 minutes per month) or higher income households (112 hours and 25 minutes per month). There are many possible reasons why lower income consumers are home during the day and available to watch TV: a higher unemployment rate, a higher propensity to work evening shifts, a preponderance of stay-at-home parents or retirement. Time-shifted DVR viewing proves most popular among higher income consumers, likely a function of device ownership, monthly service charges and content preferences. Persons within the higher income range access their DVRs to view previously recorded content for 14 hours 32 minutes each month compared to 7 hours 40 minutes for lower income consumers. Copyright 2012 The Nielsen Company. 5

6 The pattern reverses for game consoles, lower income consumers post 7 hours 15 minutes of use per month compared to 5 hours 10 minutes among higher income players. Higher volume game console use among the lower income strata may be indicative of greater reliance on streaming content such as Netflix or Hulu in lieu of paying for cable or telecommunication services content. Online Connections The average U.S. consumer spends 24 hours 51 minutes online each month, with lower income consumers outpacing that time increment by about six additional hours. (Chart X ) Facebook earns one of the leading spots on the favorite online destinations roster, with lower income consumers allocating 9 hours 5 minutes monthly to this social networking site. Middle income folks carve out 6 hours 24 minutes per month for the site, while higher income users apportion 5 hours 16 minutes to updating profiles and contacting friends. Netflix is a popular site for online streaming of video content especially among the heavy user segment of lower income consumers who spend more than twice as much time (16 hours 24 minutes) video streaming as higher income consumers (7 hours 1 minute). Mobile Patterns Income plays a large role in the acquisition of still comparatively expensive smartphones and tablets. These devices will likely become the preferred tools for online access and economic transactions in the future due to their portability and ease of use. Although it is relatively early days for both devices, one-third of lower income consumers and almost 60 percent of higher income consumers already own a smartphone. (Chart X) Online video streaming occupies 4 hours 30 minutes on average per person each month, with streaming activity diminishing as income levels rise. Lower income consumers account for the lion s share of video streaming, viewing 6 hours 38 minutes monthly. Middle income consumers jump online for 4 hours 26 minutes per month and higher income consumers fit 3 hours 36 minutes of streaming into their monthly schedules. 6 Copyright 2012 The Nielsen Company.

7 While fewer people in any income bracket possess a tablet device, the general trend remains the same, with ownership tracking income. Thirty-one percent of higher income users, 12 percent of middle income users and 4 percent of lower income users have a tablet device. Facebook emerged as the top pick among mobile applications for every income group. The five most popular applications for all income levels, albeit in a different rank order, were Facebook, Android Market, YouTube, Google Search and Gmail. Lower income consumers tend to patronize gaming or fun apps while upper income consumers seem to prefer business and weather channels. Income surfaces as a major driver behind the gap in locationbased mobile service (LBS) and overall app usage on mobile devices. Income wields less influence on mobile video and TV viewing. Higher income subscribers tend to purchase more sophisticated smartphones, which enable an easier user experience. These wealthier consumers utilize additional pay features on their mobile devices, accessing the widest variety of media content. Copyright 2012 The Nielsen Company. 7

8 Shopper Spending Spending on consumer packaged goods varies by income level with higher income households spending nearly $1200 more per year than lower income households. Shopping behaviors also vary across income groups as lower income shoppers shop more frequently and have smaller baskets, while higher income shoppers spend over $10 more per trip. As shopping strategies differ across income groups, manufacturers and retailers must tailor offers to meet the needs of each segment. 8 Copyright 2012 The Nielsen Company.

9 Shoppers Choice All shoppers patronize all channels, but certain formats attract a disproportionately high percentage of shoppers from specific income groups. Club stores and e-commerce skew toward higher income households (indexes =183 and 122 respectively) while convenience and dollar stores draw from lower income households (indexes=138 and 162 respectively). An index of 100 suggests that an income group shops the channel at a rate consistent with their incidence in the population. (Chart X) Extreme Retailing Retailing may be evolving into an extreme sport thanks to the growing popularity of extreme value outlets. A review of how grocery spending distributes across channels underscores the dichotomy between channel preferences at the higher and lower ends of the economic spectrum. (Chart X) (Chart X) Perhaps the most significant finding is that in spite of the above channel differences, grocery and mass merchandisers remain the dominant delivery channels for CPG products regardless of income level, accounting for a combined 69 percent of the total dollar spend. Higher income shoppers over-index significantly (index=222) for specialty retailers such as Whole Foods and Trader Joe s while lower income households over-index moderately for value retailers (index=127), especially the extreme value segment which includes grocers such as Aldi, Save-A-Lot and Bottom Dollar. Copyright 2012 The Nielsen Company. 9

10 Brand Influence Despite all the talk about the rise of private label goods, the bump in coupon redemption rates and general popularity of buying on deal, the simple fact remains that branded products appeal to all income strata. While it is true that lower income households tend to purchase more private label goods in both edible and non-edible categories than the other two income brackets, it is also true that national brands still constitute the bulk of their market baskets. Savvy manufacturers such as Heinz addressed the branded goods/cost dilemma by introducing special product sizes at adjusted price points to attract budget-constrained shoppers. 10 Copyright 2012 The Nielsen Company.

11 Conclusion Consumers across the economic spectrum are coping with economic pressures in different ways. Marketers and advertisers need to understand the media usage and shopping behaviors unique to each consumer group in order to respond to these shifting consumer needs. Lower income households represent a high-growth opportunity sector for retailers and manufacturers aware of emerging demographic trends. Value will remain an operational by-word for the foreseeable future across all income strata. While product development and merchandising strategies for the lower income segment may alter slightly, affecting product sizes, channel choices and price points, the bigger challenge will be deciding how best to advertise to each income group in a fragmented media setting. What consumers watch, how much they watch and how they access content shifts with income levels, complicating advertising and overall promotion decisions. Higher income consumers have multiple media platforms at their disposal, resulting in a more complex advertising environment. Different strategies will be needed to identify the most efficient methods of reaching these multi-media consumers. Technology may prove to be the great economic leveler, advancing in new directions that will empower consumers, improve media access and device affordability, in turn facilitating efforts to engage consumers across economic polarities. i Food Desert, United States Department of Agriculture. data-products/food-desert-locator/documentation.aspx ii Healthy Food Financing Initiative, Convergence Partnership, Fact Sheet. Food_Financing_Initiative.htm iii Wal-Mart, Supervalu to Open More Stores in Food Deserts, The Wall Street Journal, Business, Health Industry, July 20, html About Nielsen Nielsen Holdings N.V. (NYSE: NLSN) is a global information and measurement company with leading market positions in marketing and consumer information, television and other media measurement, online intelligence, mobile measurement, trade shows and related properties. Nielsen has a presence in approximately 100 countries, with headquarters in New York, USA and Diemen, the Netherlands. For more information, visit Copyright 2012 The Nielsen Company. All rights reserved. Nielsen and the Nielsen logo are trademarks or registered trademarks of CZT/ACN Trademarks, L.L.C. Other product and service names are trademarks or registered trademarks Copyright of their respective 2012 The companies. Nielsen Company. 12/