Consumer Psychology In Recessions

Have to give a big hat tip to Value Plays for posting this up a while ago. Harvard Business School has a video out regarding consumer psychology during recessions. Watch the video below (RSS & Email readers will need to come to the blog to view it).



In the video, they discuss how both marketing and consumer behavior can be impacted by recessions and they bring up interesting points. In the past, we've highlighted that consumer spending during recessions is not quite what you'd think it would be.

Head over to Todd's site to check out his example of how Walmart has used the economic situation to refine their message while Target has suffered. Hedge fund manager Bill Ackman of course has confronted Target (read: gone activist), as he pushes for major changes in the company.

Consumer Deleveraging & December Retail Sales

We've mentioned many times before that the consumer has a rough 2009 ahead of them and that discretionary retailers could be in the house of pain. The following data simply backs up this thesis. We recently looked at consumer spending during recessions, and you might be slightly surprised at the findings. Courtesy of the NY Times, we see that retail sales in December were weak, especially at discretionary retailers.

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You'll also take note that Walmart (WMT) continues to be one of the lone bright spots in a dark consumer world. All along, we have advocated getting short discretionary retailers and going long the likes of Walmart (WMT) and McDonald's (MCD) as a hedge. The thesis here has always been that the consumer will trade down to cheaper alternatives and thus those companies will not suffer as much as normal, non discount retailers. And, after all, its merely a hedge to our overall bearish consumer bias.

Then, courtesy of the Big Picture, we see that consumer deleveraging has actually just really begun. As this trend continues, look for things to possibly get even worse in the retail world.

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As a result of the deleveraging, we've said that the consumer savings rate will have to rise. And, lastly, as the consumer struggles along, they'll turn to their credit cards to get by once they run out of cash. Thus, the credit card squeeze begins and companies with a lot of credit card/consumer debt exposure, like Capital One (COF), will continue to see a rise in delinquencies and charge-offs.

Consumer Spending During Recessions

Todd Sullivan over at Value Plays takes a quick look at consumer spending from the 1990-91 and 2001-02 recessions. Surprisingly, Tobacco spending was down. We only point this one because in recessionary times, people are quick to point out plays like Altria (MO) and Philip Morris International (PM). When, in reality, the spending in their product category is down. The increase in education spending has already played out again this recession, as the number of MBA program applicants has been very high, if not at historical highs. Lastly, we want to highlight the massive decrease in the category: food away from home. This illustrates perfectly our thesis for shorting casualty dining restaurants in a deteriorating consumer environment and going long McDonald's (MCD) as a hedge. Because, after all, if people do go out to eat, they are going to the cheapest place out there, the golden arches.

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