Consumers in tough economy enticed by value, Citi Investment analyst says

NEW YORK Retailers who are chasing that value-oriented consumer across the store are best positioned to profit in this tough economic environment, reported Citi Investment Research analyst Deborah Weinswig in a research note Tuesday.

“Consumers are changing their shopping behavior to adapt to the current economic environment, and Nielsen data has shown that consumers are shifting to value channels, buying more private label products and increasing their coupon usage,” she said. “We believe that the retailers who cater to this value-focused consumer through low prices and targeted promotions are best-positioned to drive sales and gain market share in this environment.”

That bodes well for retailers who traditionally chase after that savings-conscious consumer, such as super centers and dollar stores—two channels that experienced an increase in foot traffic in the third quarter of 2008. And it ought to have meant good tidings for channels like drug stores and clubs as well, thanks to either the convenience position in the marketplace or, as is the case with club stores, the potential of buying bulk at a significant per-unit cost savings. However, while both the drug and club channels realized higher foot traffic in the third quarter, that traffic spiraled negative for the four weeks ending Sept. 27. “[That] is likely due to consumers cutting back as the financial crisis intensified in September,” Weinswig said.

Meanwhile, mass merchants, department stores and office supply retailers experience the largest declines in traffic of any channel for the quarterly period.

And in the same month retailers began sending out Christmas-oriented point-of-purchase material, retailers were already getting a taste of what might be this holiday season—retail sales were down 1.2 percent year-over-year in September, according to the Department of Commerce, reflecting record lows in consumer confidence. “U.S. consumers are paring back spending in discretionary categories like apparel, technology, home improvement, out-of-home entertainment and vacations more than their global peers, as shown by Nielsen's October 2008 Global Consumer Confidence Survey,” Weinswig said. “In addition, the number of U.S. consumers who reported that they had no cash to spare after covering essential living expenses was twice the global average.”

Private label sales are growing in both dollars and units, according to Nielsen data measuring the 52 weeks ended Sept. 6, as cited by Weinswig. Dollar sales of branded products grew 2.5 percent over the same period, but unit sales declined 2.4 percent. In addition, private label sales grew 3.1 percent during the last four weeks of the period.

“We believe that more consumers, including higher-income consumers, are trading down to private label to save money. Improved product quality, better packaging, and increased in-store marketing have made private label products more appealing, in our view,” Weinswig said.

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