Trading Down

My mother told me that she had purchased this fabulous jacket a few weeks ago—it was marked down by 60% and she loved it. But last week, she said, “I’m returning that leather jacket…it’s too much money to spend, especially with everything going on in the economy, don’t you think?” I was shocked. My mother might cut back on lots of things, but clothing was never in that category. Things must really be bad.

The story of my mother’s leather jacket is playing out all over the country. With the economy in rough shape and oil pinching our pocketbooks, a new and interesting trend is developing. At every segment of the wealth ladder, people are making decisions to tighten their belts – in some cases it is drastic. Economists are calling this trend “trading down” and it can be seen in retail, restaurants, vacation choices and in the auto industry.

That means that if you used to shop at Neiman-Marcus, you might head over Bloomingdales or if Target was your previous destination of choice, you might choose Wal-Mart or the Dollar Store. That’s why discount stores overall saw sales jump nearly 6% last month, while those of full-price department stores declined. According to Nielsen North America, which tracks store traffic and spending, visits to department stores are down 6% this year, down 7% at office-supply stores and down 10% at home-improvement retailers. Similarly, in the auto sector, what few cars are moving off the lots tend to be more affordable. In June, the entry-level Toyota Corolla became the best-selling vehicle in America, a spot held for more than two decades by the gas guzzling (and pricier) Ford F-150 pickup.

I think that this is great news. After a nearly two decade-long orgy of consuming, people are starting to change some of the habits that got them into trouble. All of the sudden you can see people clutching coupons as they move through the grocery store—retailers note that the use of discount coupons is starting to rebound after a 15-year slide. Dunnhumby Ltd., a consulting firm that tracks shopping habits for many retailers and says their retail clients are “radically” reducing spending, according to its analysis of their purchasing data. Have you heard about folks in the workplace brown-bagging it? In my own office, the number of people ordering in lunch has plummeted.

On the vacation front, people are staying closer to home, spending less money or taking advantage of the amazing deals that are offered. Out are the European bonanzas and in are the one week trips to a relative’s beach house. One friend told me that she used to go away for two weeks every summer, but has decided to go for one week this year and just hang out at home for the other week.
As consumers continue to adjust to the slowing economy and the reality of $4 per gallon gasoline, the “trading-down” trend will persist. Now if it holds when the economy turns around and we can learn how to save that money instead of going back to our old bad habits, then this painful period will have been well worth it in the long run.