The Maclean's Excerpt

Where have all the buyers gone?

October 14 1996
The Maclean's Excerpt

Where have all the buyers gone?

October 14 1996

Where have all the buyers gone?

The Maclean's Excerpt

Exports are hot, inflation is all but non-existent and interest rates keep falling: by rights, Canada’s economy should be poised for liftoff. But as retailers across the country know all too well, those favorable indicators are offset by persistently weak consumer spending. In the following article, excerpted

from the new book Shakedown: How the New Economy is I Changing Our Lives, Vancouver-based pollster Angus Reid, I chairman and chief executive officer of the Angus Reid Group w Inc., argues that business leaders have only themselves to blame for the low levels of consumer confidence in the 1990s.

In the fall of 1995, I had dinner with several Canadian CEOs whose companies manufacture or sell consumer products. All were eager to boast of the bold steps they had taken to improve the efficiency of their companies. In each case, they told upbeat stories about the benefits of new technology, muted somewhat by more sombre asides about loyal employees who had been let go—the price of maintaining profits in an increasingly competitive marketplace.

Eventually, we started talking nuts and bolts. “How’s business?” I asked. At first, a few replied that things weren’t that bad, but before long, most admitted that sales were lousy. “We’re hav-

Reprinted with permission from Shakedown: How the New Economy Is Changing Our Lives by Angus Reid, copyright Black Sturgeon Enterprises Inc., published by Doubleday Canada Ltd., Toronto.

ing a lot of trouble getting people to spend money,” said one CEO, a man with a long-standing reputation for success in the marketplace. “Even people with decent jobs are worried about whether they’re going to keep them, so they’re not spending.”

So there it was: the perverse irony of the Canadian economy today. The people in charge are brandishing the sharpest knives they can find to cut the fat out of their operations—all in the name of profits, of course. The problem with knives, however, is that they sometimes have two edges. If you’re careless, it’s easy to end up cutting your own throat.

I’ll begin with the obvious: the knives being wielded are being pointed outward at the competition even more fiercely than they are being pointed inward at perceived inefficiencies. A street fight is under way in the international

EXCERPT

marketplace, the likes of which the world has never witnessed. Those lines mapmakers draw on globes no longer represent latitude and longitude; they represent store shelves, stretching from your local shopping centre around the world and back again. It is on those endless shelves that the war for consumers is being fought.

Nor are businesses themselves likely to walk away unscathed. Cutbacks at work—loss of jobs, lower wages and benefits— inevitably create cutbacks at home. People with less money to spend do something fairly predictable: they spend less. Decreased household spending, of course, means decreased demand for consumer products. And decreased demand for consumer products, as any Economics 101 textbook will tell you, leads to more cutbacks at work, wherever these products are produced. This can become a vicious circle, which is what happened during the Great Depression.

Unless a company is focusing entirely on foreign markets, there is a message here: don’t expect improved domestic demand if ordinary people are afraid to part with their money. The first reaction to cuts in the workplace is that many consumers will simply not be able to buy as much product, or will be wary of buying as much product, because they have lost their jobs, are afraid of losing their jobs or have been shunted into low-wage jobs.

The second reaction, I predict, will be attitudinal. If employers are going to be ruthlessly efficient, why shouldn’t consumers? If leanness and meanness create a more efficient workplace, why can’t ordinary people create a more efficient home the same way? If employers are willing to go to any extreme to cut corners, why shouldn’t consumers? Many of us were willing to pay a premium for image in the 1980s when brand names were the fashion. But why be a sucker if you know that with a little patience, you’ll be able to buy a product of decent quality on sale? Why be loyal to a particular brand, Canadian or not, if another one is cheaper? If producers are going to inordinate lengths to squeeze workers, why not go to inordinate lengths to squeeze back?

There is a third factor. If employees who used to mean so much to the economy are suddenly expendable, why not declare things we’ve been purchasing for years expendable in the home? How much of what we buy do we really need?

From the mid-1960s to the late 1980s, it was fashionable to indulge ourselves, buying what we wanted, whenever we wanted it. What if living more intelligently, more frugally, not only becomes more important but actually becomes fashionable? Frugality is certainly fashionable in the business world (with the exception of upper-end executive salaries). Why not at home? And if Canadians pared down their own consumption patterns, wouldn’t that cause

The purchase of so-called big ticket items is down sharply

more Canadian-based companies to close? Or to be absorbed by huge corporate interests that are gaining a tighter stranglehold on the international marketplace?

If you read past the stock market analysts on the business pages, you will see that Newton’s third law of motion—to every action there is always opposed an equal reaction—is already swinging into action. Cash registers aren’t humming the way they used to, especially during traditionally high-volume periods like Christmas, when sales of high-profit merchandise compensated for slower seasons. In December, 1995, a young woman interviewed on a news show put other shoppers’ reticence in a nutshell: she said she now feels “foolish” if she pays more than the sale price—for anything.

In short, after serving as the primary engine of economic growth for two generations, household purse strings have begun to tighten. For almost 30 years, ending in 1990, real growth in household consumer spending increased, on average, by over four per cent per year. Fully 60 per cent of GDP growth between 1965 and 1989 was based on increased consumer spending.

During the first five years of the 1990s, however, growth in spending has inched forward at one per cent a year. In only one year (1994) did it rise above two per cent. When per-capita spending is taken into account, consumption of personal goods and services actually declined between 1989 and 1995.

When consumer spending first began to topple in 1990, analysts blamed the country’s national scapegoat, Brian Mulroney. And why not? Mulroney’s government had introduced the reviled GST in 1990, which immediately made a host of household goods and services more expensive. Canadians shuffled south to make GST-free purchases, creating temporary mini-booms in such cities as Buffalo and Bellingham.

By 1992, the shock of the GST had started to wear off. The declining value of the Canadian dollar made U.S. purchases increasingly expensive. But even with most Canadians staying home, consumer spending growth didn’t return. This time, postrecession blues were blamed. One bank economist (echoing dozens of others) said that Canada was undergoing nothing more than “the kind of adjustment that normally follows a recession.” Indeed, by 1994 it seemed that the worst was behind us. Consumer spending growth finally rose above two per cent that year. But it proved to be a blip.

Retailers and manufacturers are now increasingly concerned that emaciated consumer spending will be a chronic symptom of the post-1989 economy. They have every reason to worry. The current state of household finances in Canada is not encouraging. In fact, it’s alarming. The unemployment rate, hovering between nine per cent and 11 per cent, is clearly understated, given the hordes who have given up finding work and aren’t counted as jobless any

more. Even for those working, individual takehome pay has fallen by approximately five per cent since 1990. At the same time, debt levels have increased from 80 per cent to 93 per cent of personal disposable income. Housing prices, which kept increasing during the 1970s and 1980s, giving homeowners the feeling that they were getting wealthier, have dropped significantly in most cities, particularly in Eastern Canada. Not to mention the widespread fear that the safety net constructed for the sick, disadvantaged and elderly may soon be unrecognizable.

Uncertainty has a way of magnifying problems out of all proportion, thereby creating additional problems. In the spring of 1996, about 30 per cent of Canadians told us they felt that they, or someone in their family, would probably be laid off or become unemployed in the next 12 months. That adds up to about 3.3 million households. Of course, 3.3 million Canadians are not going to lose their jobs next year. But what if all these people really believe that they could be the unlucky ones? That’s a lot of new car purchases delayed, shoes resoled and a significant increase in the number of Kraft Dinners served. Sooner or later, the GM plant in Oshawa, the Sears shoe department in Burlington and the Loblaws meat counter in Hamilton are going to feel the effect, if they haven’t already. Perception becomes reality. Prophecies—even false ones—often fulfil themselves. Job anxiety is poking at the lives of Canada’s disillusioned middle class. What used to constitute fear for the young, the uneducated and seasonal workers has crept into more refined neighborhoods.

All of this would make anyone, of any age, nervous. But older people, except for those already retired on fully indexed pensions, tend to be more jittery than young people, and the big bump of baby boomers is aging quickly. Though the official “savings rate” has been in decline throughout this decade, investments in RRSPs are at record levels.

Boomers are now putting more emphasis on saving than spending. Many of the expenses associated with forming families are behind them—homes have been bought (if not always paid for), the appliances are still working and the kids have part-time jobs and are buying their own clothes. So it’s time to put some money aside. Good for the banks, but bad for retailers and sales clerks.

The new Canadian consumer, moreover, is volatile. People who used to buy one brand out of habit—often a habit ingrained by television advertising—have become far less monogamous. Today, the odds are no better than 50-50 that a person who picks up a product at the grocery store one week will buy the same brand a few weeks later. Merchandisers, who know that it costs approximately five times as much to win a new customer as it does to keep an old one, are frantically trying to figure out how to pitch products in a way that will keep people in the fold.

It’s a tough job. The old slogans just don’t seem to work any more. It’s as though Canadians have sensed a declining commitment to them as employees and are fighting back, displaying declining loyalty when they take their hard-earned money to the

stores. Air travellers used to have clear preferences for either Air Canada or Canadian. Now, they choose whoever offers the best deal. Department stores and retailers watched in horror as tens of thousands of once loyal customers marched off to Wal-Mart when it entered Canada in 1994. U.S.-based price clubs have made a huge dent in the grocery market. Even the banks are worried. Despite record profits, bank CEOs know that they can no longer take customer loyalty for granted. Our surveys show that at any given moment, as many as 20 per cent of all bank customers are thinking of switching banks.

Consumers with less money to spend also get careful. The “I deserve this” attitude of the 1980s may still be popular with the Rolex set, but for most Canadians the splurge days are history. Bargain bins, dollar stores, secondhand sports equipment and clothing, and home renovations are now among the hot items. Says George Kosich, president of The Bay: “We no longer have the egointensive, free-spending consumer of the 1980s; we now have the well-informed, value-intensive, functionally inclined, price-sensitive customer of the ’90s. The value-seeking customer is no longer at the lower levels of income, but at all levels of income.”

As a result, it’s hard to find anyone who wants to buy anything these days that is (a) big, (b) expensive and (c) not really very interesting (washing machines, dryers, televisions, freezers, microwaves, dishwashers, furnaces or family cars). With the exception of home computers, which still carry some novelty, the purchase of so-called big ticket commodities is down sharply. A 1994 Royal Bank survey detected a new reluctance among Canadian consumers to buy anything bigger than a breadbox unless it was absolutely needed. Clothes? Secondhand clothing stores are thriving, and people who wear “previously owned” clothing actually brag about it. Cars? Alex Drozdow, co-ordinator for the used car division of the Automotive Retailers Association of B.C., claims that “used cars don’t carry the stigma they used to.” Sports equipment? Many Canadian sporting goods stores have gone under, victims of the predatory pricing of American-based chains. But used sports equipment stores are popping up in their place, and it isn’t unusual to see CEOs and cabinet ministers taking their children there.

For a huge number of Canadians, then, the future is becoming an obsession. Less certainty of employment. Lower wages for those lucky enough to have a job. Less protection, after welfare and unemployment insurance reform, for those without jobs. And increasing levels of debt for everyone. Consumer confidence, according to our surveys, is at best anemic. All of this reflects what the economic writers like to call “cautious consumers.” This is a euphemism for people mesmerized by fear. Let’s not be delicate. Let’s not call it caution, or reluctance or uncertainty. Let’s call it trauma.