Frugality Fatigue Spurs Americans to Trade Up

Photographer: Emile Wamsteker/Bloomberg

People are reflected as they walk past an outlet store in New York. Close

People are reflected as they walk past an outlet store in New York.

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Photographer: Emile Wamsteker/Bloomberg

People are reflected as they walk past an outlet store in New York.

Americans are buying more expensive makeup and sandwiches again as Estee Lauder Cos. (EL) and Dunkin’ Brands Group Inc. (DNKN) get a boost from mid- to high-income customers.

“Frugality fatigue” is driving a rise in retail sales among consumers who’ve “grown tired of putting off discretionary purchases,” said Russell Price, a senior economist at Ameriprise Financial Inc. (AMP) in Detroit. Recent gains, including a 6.5 percent increase in February from a year earlier -- have been bolstered by improvements in consumer confidence and the labor and stock markets, along with some stabilization in home prices, he said.

“This has been a long, drawn-out recovery; and for most people alive today, it’s the longest they’ve had to conserve financially,” said Price, who was among the top-ranked forecasters of quarterly gross-domestic-product growth for the two years ending in February, according to the most-recent data compiled by Bloomberg. “As their prospects improve, some pent- up demand is being released.”

Even with a less-than-predicted gain in U.S. nonfarm payrolls last month -- 120,000 compared with a median forecast of 205,000 in a Bloomberg survey -- the economy has added 635,000 jobs since December as unemployment fell to 8.2 percent from 8.5 percent, Labor Department data show. Meanwhile, the median price of existing homes climbed 0.3 percent in February from a year earlier, the biggest gain since July 2010, and the Standard & Poor’s 500 Index is up 10 percent this year.

Photographer: Emile Wamsteker/Bloomberg

Employee Tom Machi hands change to a customer at a Dunkin' Donuts Inc. store in West Orange, New Jersey. Close

Employee Tom Machi hands change to a customer at a Dunkin' Donuts Inc. store in West Orange, New Jersey.

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Photographer: Emile Wamsteker/Bloomberg

Employee Tom Machi hands change to a customer at a Dunkin' Donuts Inc. store in West Orange, New Jersey.

‘Feeling the Wealth’

Mid- to high-income consumers are “feeling the wealth effect” from an “amazing run” in the stock market, said Britt Beemer, chairman of America’s Research Group, a consumer- behavior research and consulting company based in Charleston, South Carolina. The gain is leading some people to purchase name brands in lieu of generic or buy spring fashions before they’ve been deeply discounted, he said.

Sentiment among people earning more than $50,000 fell to minus 12.2 in the week ended April 8 from a four-year high of minus 8.2 the prior week, according to the Bloomberg Consumer Comfort Index. Americans making more than $100,000 were the only income group with a positive reading: 9.7 (COMFO100), the second-best since January 2011.

Estee Lauder’s “high-end luxury” skin-care and makeup brands are growing “faster than average,” benefiting from consumer trade-up and affluent shoppers, President and Chief Executive Officer Fabrizio Freda said Feb. 24 at the Consumer Analyst Group of New York conference. The New York-based company’s 16.5-ounce Crème de la Mer moisturizing cream sells for $1,800.

More Appetizers

Customers at BJ’s Restaurants Inc. (BJRI) eateries are ordering more appetizers or drinks with their meals, Chairman and Chief Executive Officer Gerald Deitchle said on a Feb. 16 conference call. As a result, the Huntington Beach, California-based operator is “selling more items per 100 guests today than we ever have in the history of the company.”

Americans will probably eat out more frequently in the next 90 days -- and spend more while doing so -- as their financial health improves, based on monthly surveys by RBC Capital Markets in New York.

The portion of respondents who said they spent more than planned at restaurants during the past 30 days reached a record 31 percent in February, according to a quarterly survey. They predicted they will spend a combined $37.01 on restaurant meals each week for the next three months -- up 2.7 percent from a year earlier.

‘Plodding Uphill’

Consumer-spending plans rose at full-service restaurants for the second consecutive quarter and fell at quick-service establishments, suggesting people probably will trade up again after a year of trading down, said Larry Miller, an RBC analyst in Atlanta. Though dining-out intentions are “plodding uphill” from low levels, there’s some momentum for a further recovery, he said.

“This trend is encouraging because it’s rooted in strong economic fundamentals,” Miller said, noting that one of the most-cited reasons for increased purchasing plans was an improving economy. The U.S. will expand 2.3 percent this year, according to the median estimate of 75 economists surveyed by Bloomberg News from April 6 to April 11. Growth last year was 1.7 percent.

Even customers at fast-food chains such as Dunkin’ Brands doughnut shops are opting for a “better level of sandwich,” Chief Executive Officer Nigel Travis said on a Feb. 9 conference call. This has helped to drive a “higher average ticket,” with its smoked-sausage breakfast sandwich one of the best- performing, limited-time offers in the Canton, Massachusetts- based company’s history, he said.

‘Live With Less’

As Americans have “learned to live with less,” income-tax refunds could increase their willingness to spend, Beemer said. For the first time in six years, people will have money left over for discretionary purchases, after about two-thirds used a majority of these funds to pay off bills or credit cards in the past, he said, citing his company’s late March survey of 1,200 consumers nationwide.

The spending boost may be temporary, because rising gasoline prices are “the biggest nemesis to retail sales,” Beemer said. The average gallon of regular unleaded is up about 22 percent to $3.91 (3AGSREG) -- near a three-year peak -- from a low of $3.21 in December, according to Heathrow, Florida-based AAA, the largest U.S. motoring organization.

Some low-income consumers still are demonstrating frugality, and industry data show there’s a “barbell” phenomenon, with fine-dining and fast-food restaurants doing well and middle-tier eateries struggling, Miller said.

Fixed-Price Menu

Ruth’s Hospitality Group Inc. (RUTH), which operates upscale steak and seafood restaurants, introduced a fixed-price meal for these “special occasion” diners to keep sales up, even though “life is largely back to normal” for its more-affluent customers, Chief Financial Officer Arne Haak said at a March 6 conference hosted by Raymond James & Associates Inc.

Kroger Co. (KR), with grocery stores in 31 states, also has seen bifurcated spending patterns, Chief Financial Officer Michael Schlotman said at a March 28 Telsey Advisory Group conference. Its “budget-minded” shoppers continue to “show significant signs of stress and are more likely to trade down” when there are signs of economic weakness.

Even so, recent trends are encouraging, said Price of Ameriprise, a financial-planning and services company, who sees the disappointing March payroll numbers as an “aberration.”

As “employment prospects improve, consumers are going to put some additional spending back into the economy,” he said.

To contact the reporters on this story: Anna-Louise Jackson in New York at ajackson36@bloomberg.net; Anthony Feld in New York at afeld2@bloomberg.net

To contact the editor responsible for this story: Anthony Feld at afeld2@bloomberg.net

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