Where Cautious Consumers Are Causing Chaos

As Americans rein in spending, BusinessWeek looks at three key industries that are taking significant hits

Cutting costs has become an obsession for many consumers. With home prices falling and layoffs rising, many in the U.S. and around the world are seeking creative ways to save more.

U.S. consumers saved $545.5 billion in January, the Bureau of Economic Analysis said Mar. 2. That's a savings rate of 5%, up from just 0.1% one year before. Expensive, one-time purchases seem to be the first to go. So, new auto and home sales have plunged, while casinos and resorts see fewer visitors.

But much emphasis also is being placed on reducing daily and monthly expenditures. (Last August, BusinessWeek offered its own tips on reducing your regular spending.)

For investors tracking this trend, it's become apparent that this spending slowdown is not hitting every firm equally.

Sales at discounters like Wal-Mart (WMT) or Family Dollar Stores (FDO) are holding up well. Investors have spared the stocks from the significant damage suffered by other retailers, with Wal-Mart shares down just 5.5% in the past year and Family Dollar's stock actually higher by 59%.

However, tightfisted consumers are having serious effects on companies in industries that serve the better-heeled. BusinessWeek surveyed analysts who cover three industries that are prime recipients of discretionary spending—makers of alcoholic beverages, operators of health clubs, and luxury-goods manufacturers—to gauge the effects of the spending slowdown.

Alcoholic-Beverage Firms: Low Spirits

Consumers are still drinking, but they're drinking differently, says Esther Kwon, a Standard & Poor's equity analyst who covers brewers and distillers.

Shares of Brown-Forman (BFA) fell almost 10% on Mar. 10 after an earnings report that showed disappointing sales for its pricier Southern Comfort and Jack Daniel's whiskey brands. It's part of a shift toward cheaper drink options among consumers, Kwon says.

"People are not going out as much and, when they do, they're buying lower-priced drinks," she says. Customers might choose less fancy vodka in their mixed drinks, or order a beer instead.

This follows trends in previous recessions. Natixis Securities analyst Francois Digard notes that the U.S. beer market was relatively unchanged in the 2000 recession. Beer volumes fell 4.5% in the 1991 downturn, but spirits dropped 8.5% and wine volume fell 10.2%.

"Trading down always happens" in downturns, Kwon says. But, "this time it's [happening] a little faster than people had expected."

Health Clubs: Feeling the Burn

Another place consumers can cut back is on monthly charges like health clubs.

Morgan Keegan analyst John Lawrence downgraded Life Time Fitness (LTM) last month, saying he "remain[ed] concerned on the sustainability of membership growth."

By opening new clubs and offering aggressive sales, Life Time continues to boost membership numbers. But other trends are troubling. Attrition at Life Time clubs—the number of members not renewing memberships—has risen over the last four quarters, from 35% to 38% to 41% and to 42.3% last quarter.

Another smaller firm, Town Sports International (CLUB)—which operates urban Sports Clubs in Boston, New York, Philadelphia, and Washington, D.C.—saw its stock drop 12.8% when it reported earnings on Mar. 3.

The firm's clubs lost 9,000 members in three months, to a total of 510,000. Executives said they expected earnings and membership to continue falling in 2009.

Luxury Goods: Not So Swell

Wealthy, upscale, urban consumers are slashing spending, and the best evidence may be trends among luxury-goods retailers. Their globetrotting customers are staying home and spending less, according to analyst Rey Wium, who tracks the world luxury industry at Afrifocus Securities, based in South Africa. World air travel is a good gauge of luxury spending, Wium argues. International passenger movements rose 5.9% in the first half of 2008, while luxury-goods sales rose 12%. In the last quarter of 2008, travel fell 4.3% and sales dropped 8%.

Wium predicts luxury-goods sales could fall 10.6% in 2009.

Such prospects are reflected in investors' opinion of retailers like Saks (SKS). Shares in the high-end department store have fallen 87% in the past year, making it one of the worst large-cap stocks in the U.S. On Mar. 10, Standard & Poor's Ratings Services lowered Saks' credit rating from B to B-. It cited "steep declines in same-store sales and heavy markdowns of goods."

February retail sales data, set to be released Mar. 12, will give a full picture of U.S. spending trends. But, several months into a severe cutback in spending, it's clear that consumers are cutting out many of their higher-end, more sophisticated spending habits—whether that is urban health clubs, expensive apparel, or quality vodka.

Firms hurt by this trend are many of the same firms that benefited from the boom years, when wealthy and upper-middle-class consumers were spending freely. From mid-2004 through 2007, shares of Saks rose 42.5%, Brown-Forman stock rose 58%, and Life Time shares jumped 131%.

Now these firms must follow their consumers downscale, offering discounts and aggressive marketing campaigns to keep their once-reliable customers spending. Maybe it's time to dust off the old "Luxury you can afford" slogan as a new generation tries to live large for less.

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