Brand Disloyalty: Recession-weary Consumers Take Discounts to the Extreme

Before Joanie Demer even sets foot in a grocery store, she thoroughly maps out her game plan. First, Demer, a married mother of two, gets her hands on several of the glossy circulars from her local Sunday newspaper and files away a few copies of each coupon inside. Next, she checks her favorite Internet coupon aggregators -- Smart source.com, Redplum.com, as well as her own site, TheKrazyCouponLady.com -- for printable coupons. She scours Facebook and company websites for other deals and uploads barcodes for vouchers to her smartphone.

When she shops, Demer eschews brand loyalty for the best bargains. She often goes to multiple grocery stores depending on weekly discounts and is known to come home with a dozen 16-ounce jars of peanut butter if she has a coupon and the math works out. She hits membership warehouse chains -- such as Costco or BJ's Wholesale Club -- for their fresh produce and dairy specials. For toiletries, she frequents chain pharmacies, such as Rite Aid and Walgreens, where her coupons entitle her to razors and bars of soap for free or for just pennies on the dollar.

Demer, who lives in a remote corner of Humboldt County, Calif., spends about $40 a week on groceries, which is less than half of what she used to before she started couponing. She says she is not a "survivalist consumer," but nor does she cringe at the description, either.

"I don't have a bunker full of a massive stockpile, and I'm not afraid of a government collapse or impending nuclear disaster," says Demer, who self-published a book titled, Pick Another Checkout Lane, Honey. "But in this economy ... it's smart to have a certain amount of food on hand. You never know when you might lose a job or have a medical emergency. It's good not to have to go to the grocery store for a few weeks and spend money you don't have."

While Demer's zeal for grocery deals may border on the radical, her shopping practices are not unusual in mainstream America. As the unemployment rate hovers at a stubborn 9% and the food category of the consumer price index continues to rise, Americans are making subtle but important changes to their grocery buying habits in an attempt to stretch their household budgets.

A weekly food stock-up used to mean a trip to the nearest supermarket and a cartload full of groceries chosen by brand preference, not price. Those days are gone. Customers today are chasing the best deals by shopping at multiple grocery stores depending on the sales, stocking up on products when they are being deeply discounted or bulk-buying at warehouse club chains. They are using the Internet to comparison shop or, like Demer, engaging in extreme couponing, a trend with its own reality TV series.

"The era of conspicuous consumption, with the mindset of, 'I work hard; I deserve to waste money,' is pretty much done. Budgets are tight, and people are in the bargain-hunting mood," notes Stephen Hoch, a Wharton marketing professor. "Because there is more information available on pricing and quality, it's easier to make smarter decisions than it used to be" about shopping at multiple bricks-and-mortar locations, or online if necessary. "Extreme couponing takes less effort than it used to," he adds. "Why leave money on the table when you don't have to? Brands are playing that card, and retailers are reinforcing it. They are sending a message [that they] understand consumers are smart and savvy."

Brands may be surviving this new era of household austerity by increasing the number of coupons they issue. But this is not a smart long-term strategy, note experts. Coupons and short-term promotions train customers to expect more for less, and do not cultivate brand loyalty -- in fact, they may make customers even more fickle.

Bulking Up on Discounts

Saving money on groceries is not easy these days. The Department of Labor reported on October 18 that food prices rose 0.4% in September, pushed up by increases in the cost of cereal, fruit and vegetables. Dairy prices have climbed 10.2% in the past year. As it is, grocery store chains have a lot of fixed expenses and thus operate with slimmer margins compared to the standard industrial company, according to Value Line, an investment research firm. Their operating margins, which tend to run in the mid-single digits, are even narrower today because of a flood of competition from other retailers.

"It used to be that location was the biggest factor in supermarket shopping choice. But now people are looking more at prices," and are willing to travel to find the best deals, according to Lars Perner, a professor of clinical marketing at the University of Southern California's Marshall School of Business. Many of the best deals are found in places other than the local grocery store. Chains today compete with drug stores, dollar stores and supercenters, in addition to websites and membership warehouse clubs.

The warehouse clubs -- Costco, the third largest retailer in the U.S., Sam's Club, a division of Wal-Mart, and BJ's, which has a strong foothold in the Northeast and Mid-Atlantic -- sell everything from bulk packages of paper towels and boxes of Cheerios to fine wines and diamond engagement rings. They always tend to do better in a poor economy, but this downturn has been especially profitable. Costco's net sales increased 15% to $8.6 billion in September, while U.S. same-store sales rose 7% during that period. In the last five years, Costco has grown its membership base by 25%. BJ's, which was recently taken private by an equity investment group and no longer reports monthly sales data, has experienced a similar trend: As of July, the chain saw a 6.7% increase in same-store sales year-to-date. In the second quarter of this year, Sam's Club reported that its sales rose 16.2%.

One reason for the current popularity of warehouse chains is that customers are stocking up on groceries now because they are not sure if they will have the means to buy them later. "It's hard for people to interpret the macroeconomic scene," Perner points out. "People are afraid of losing their jobs. But even if they get to keep their jobs, they probably won't be getting any overtime, a raise or a holiday bonus.... There is a desire for a safety net."

In recent years, Costco and other warehouse chains have stolen market share from traditional grocery stores by enlarging their stock of fresh fruits, vegetables and meat. The economic downturn moved people to shop at warehouse clubs to save money, and many consumers had an epiphany, says David Reibstein, a Wharton marketing professor. "They realized, 'Wow, I'm able to get all of the products that I want but at a significantly lower price.' This recession has been a windfall for Costco [and places like it]." Wall Street has taken note. Warehouse club companies are considered some of the most "recession-resistant" equity bets. From January 2008 to today -- arguably some of the toughest years in stock market history -- shares of Costco are up 21%. By contrast, the Standard & Poor's index is down 15%. Over the past seven years, BJ's stock climbed 192% (the stock was recently de-listed) and Costco's rose more than 200%.

The Coupon Comeback

Another cost-saving strategy for grocery shoppers: clipping coupons. Coupon redemption in the U.S peaked in 1992 (at the end of a recession) when 7.9 billion coupons were cashed in, according to Inmar, a North Carolina-based company that processes coupon transactions. By 2006, that number had declined to 2.6 billion and languished there for years.

But in the fourth quarter of 2008, as cracks in the subprime mortgage market erupted into the most severe global financial crisis and recession since the Great Depression, coupons made a comeback. In 2009, companies issued 367 billion coupons and shoppers redeemed 3.3 billion of them, a 27% increase. In September, Inmar reported that coupon redemption rose 1% for the first six months of this year, compared with the same period in 2010.

"At the low end of the economy, where people are struggling because they have lost their jobs or they fear they will lose their jobs, people are, out of necessity, clipping coupons," saysBarbara Kahn, director of Wharton's Jay H. Baker Retailing Center. "It's a short-term response. [Consumers are thinking,] 'I only have X amount of money, and I have to make it work.'"

Coupons are not just for down-at-the-heels penny pinchers, however. A poll of more than 1,000 U.S. consumers conducted last year by Harris Interactive found that coupon use is highest among well-off, educated city dwellers. According to the survey, 61% of adults with annual household incomes of more than $100,000 said they had redeemed a coupon in the preceding six months. In addition, adults with college degrees were almost twice as likely to have used a coupon for a purchase in the previous half-year as those who did not graduate from high school. More than three quarters of those who redeemed a coupon of any kind during the previous six-month period lived in metropolitan areas.

"There has been a significant change in the cultural meaning of coupons," notes Frédéric Brunel, a marketing professor at Boston University's School of Management. "Even just a few years ago, coupons weren't hip.... Coupons did not symbolize success or achievement; they were only a few levels above food stamps. But now, clipping coupons is a celebrated, cool, middle-class thing to do."

Technology is accelerating the movement toward couponing. While paper coupons still make up the bulk of coupons redeemed, Internet coupons and mobile phone coupons -- usually in the form of a text message with an embedded discount code -- are also growing. NCH, a marketing research firm, reported a 37% increase in the number of digital coupon offers last year. In addition, coupon aggregators and online group buying sites, such as Groupon, have proliferated. "Technology is not only making it easier and more accessible to look for deals, but it is also amplifying and reinforcing the social reach of this phenomenon," says Brunel.

The couponing trend has even inspired a reality television show. "Extreme Couponing", a series on the TLC cable channel that debuted last year, features shoppers making extensive use of coupons to save money on their grocery bills. In many cases, shoppers walk away with carts full of food and other staples, but pay only pennies on the dollar through the use of multiple discount offers. "Although it makes for some entertaining TV, we don't know the boundary and actual reach of the more extreme forms of this phenomenon," notes Brunel, adding that one thing is clear: "There is glory to be had in saving as much money as you possibly can by using coupons."

Strategic Promotion

Have Americans made permanent shifts in the ways in which they stock their pantries, or have they merely made temporary adjustments in the face of a terrible economy?

Experts say warehouse club chains are likely to continue to eat away at the market share of traditional grocery stores even after economic conditions improve. By offering consistent value, warehouse clubs have impressed deal-seeking customers. But most experts predict that shoppers who are currently bulk buying their groceries out of concerns about not having the means later will likely stop. Similarly, shoppers in general are likely to become less aware of store sales and price reductions.

Manufacturers' coupons cut into the margins of the original issuer, not the retailer. Coupon clippers like Demer, the self-proclaimed "Krazy Coupon Lady," save money by shedding any modicum of brand loyalty in favor of purchasing whatever is on sale. Demer, for instance, has learned to live without expensive products. She says she never buys a bottle of shampoo unless she has a coupon for it.

"Brands need to think strategically about how they use promotions and how they incentivize customers," Brunel states. "When the consumer gets something at a deep discount, they might perceive the quality [of the product] to be lower, or attribute their choice to the price discount versus the inherent quality of the good or service. This is not a good recipe for long-term brand equity building." Moreover, customers become addicted to the discounted price, says Kahn, who is also a Wharton marketing professor. "When you start playing the price promotion game, people feel that they're being cheated if they then pay more than the discounted price in the future."

Still, it is hard to say whether the couponing movement will remain as fervent once the economic landscape looks brighter. "In previous recessions and economic downturns, we saw things like an upsurge in store-brand products. People changed their behavior to weather the economic storm," Reibstein notes. "But usually when it was over, people reverted to form and went back to their favorite brands."

Knowledge@Wharton