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VOLUME XVI, ISSUE 39

L.E.K. Consumer Sentiment Survey #11: Consumers Are Feeling Better About Spending was written by Francois Mallette, a managing director in L.E.K. Consulting’s Boston off ice. For more information, contact retail@lek.com.

For the first time since the fall of 2011, we are seeing a

noticeable uptick in consumer sentiment and outlook for

overall spending. So does this mean retailers should expect

a bonanza in upcoming sales? The broader explanation will

reveal itself through the following analysis of our recent

research. The data suggests that consumers may finally be

poised to open their wallets a little bit.

In the summer of 2014, L.E.K. Consulting surveyed 1,300 U.S.

consumers across all major demographic groups to gauge

their attitudes toward the economy, their personal finances

and their expectations for purchases across 17 categories of

spending. This Consumer Sentiment Survey (CSS) is the 11th

since 2008 and it tracks consumers’ spending expectations

for the following months by both income and age groups,

surfacing a range of implications for retailers and consumer

products manufacturers alike.

L.E.K. Consumer Sentiment Survey #11: Consumers Are Feeling Better About Spending

Economy on More Solid Footing

Since the end of the recession in 2009, economic indicators

have improved, albeit very slowly. Real personal income has

increased by 3.8%, and unemployment has dropped from a

high of 9.5% to 5.9% in September 2014. New and existing

home sales rose modestly with 12% gains and auto sales

showed a healthy 63% uptick. At the same

time, consumer debt continued to grow, fueling

some growth in retail sales. The confluence

of this activity offers one encouraging sign:

real retail sales (excluding autos) have finally

regained the level which they reached before

the economic downturn (see Figure 1), although

growth has been slow and protracted.

Positive Outlook for Personal Finances But Unbalanced Spending Due to Income Divide

Against the backdrop of slow yet steady gains in the

economic recovery, consumers across all income categories are

expecting their personal finances to be better over the coming

months based on our survey findings. The outlook is even

more buoyant among higher income households (those in the

$75K-$200K and $200K+ household income groups).

Against the backdrop of slow yet steady gains in the economic recovery, consumers across all income categories are expecting their personal finances to be better over the coming months

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Some product categories appear more likely to benefit from this

increased expectation to spend. While consumer staples such

as groceries have consistently led the 17 categories in which

consumers have expected to increase their spending (although

by very little), CSS11 shows that discretionary categories such

as home renovations, vacations, cars and furniture have made

their way to the top of the list of growth in expected spending.

“What we are seeing is most likely a combination of pent-up

demand and a real up-tick in consumer confidence,” says

Francois Mallette, managing director and head of L.E.K.’s

North American Private Equity Practice, who led the research

effort. “But it’s definitely an encouraging sign; when we

conducted the survey in the past, consumers expected to

increase spending in very few categories.”

Page 2 L.E.K. Consulting / Executive Insights Volume XVI, Issue 39

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However, further evidence from our survey shows how the

hourglass economy is affecting and reshaping consumer

spending patterns. For example, the top 30% of households

by income account for nearly 60% of total consumer

spending (see Figure 2). Conversely the bottom 50% of

households account for only 25% of spending.

Consumer Spending Projections Show Marked Improvement

Since the fall of 2011, despite acknowledging that they expect

their personal finances to improve, consumers have remained

cautious about their expectations for personal spending over

the next six months. In this survey, consumers overall have

indicated an important improvement in their expectation for

spending. While consumers are notoriously difficult to read, the

data shows that this is the largest improvement in spending

expectation since immediately after the precipitous decline in

spending that occurred in 2008.

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Notes: Sales data is adjusted for seasonal, holiday, and trading-day differences, but not for price changes; ** Real monthly sales indexed to January 2005 and adjusted with CPI data; monthly data up to, and including, February 2014Source: Bureau of Labor Statistics, U.S. Census Bureau, L.E.K. analysis

0

220

230

240

250

260

270

280

290

300

$310

Pre-recessionnominal peak

Pre-recessionreal peak

Recession period

Nominal retail sales

Real retail sales

2005

Q1 Q4Q2 Q3

2006

Q1 Q4Q2 Q3

2007

Q1 Q4Q2 Q3

2008

Q1 Q4Q2 Q3

2009

Q1 Q4Q2 Q3

2010

Q1 Q4Q2 Q3

2011

Q1 Q4Q2 Q3

2012

Q1 Q4Q2 Q3

2013 2014

Q1 Q4Q2 Q3 Q1

Figure 1 U.S. Retail Sales (excluding autos)

Real Retail Sales Regain Pre-Recession Peak

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Millennials Lead the Pack

Millennials are a beacon of optimism in what is still a relatively

tepid consumer landscape. This large cohort, ages 18 to 34,

makes up about 31% of the adult U.S. population. Millennials

are more sanguine about the economy and they expect their

spending to increase more than any other age groups over the

next six months. Their rise in projected spending is driven by

expectations that their incomes will grow. Other reasons they

cite for increasing their spending are a major life event, a rise

in the value of their financial assets and better job security.

Online Shopping Is Here to Stay

The Internet shopping tidal wave continues to erode in-store

sales, and retailers without a compelling e-commerce strategy

are suffering as a result. Our survey indicates that online

shopping has achieved significant acceptance among all age

brackets, with younger groups slightly more likely than older

groups to shop online, but only by a small margin. While

online shopping is prevalent across all age groups, younger

consumers report a much higher level of engagement with

mobile shopping, and more than 80% of millennials say they

make purchases on their mobile devices, versus only about

half of consumers 55 and over.

Consumers report plans to increase online spending over the

next six months, citing such advantages as convenience, ease

of use, product availability, and selection. Big box, fast fashion

and department stores appear to be most vulnerable to the

ubiquity of online shopping, with consumers saying they have

already changed their shopping behavior by reducing their

visits to these types of retailers.

Key Takeaways and Implications

Overall, consumer sentiment has shifted in a more positive

direction, an encouraging sign for retailers and consumer

products companies. But this outlook does not hold true

across the board. Wealthier consumers are far more likely to

open their wallets in the coming months than consumers in

lower income brackets, who are still planning to cut back.

Number of householdsby income bracket

Spending as a portion of household income (before taxes)

Total consumer spendingby income bracket

$200K+$75-199K$50-74K$25-49K<$25K

Note: Households earning $75K+ annually make up ~32% of all households but account for ~57% of all expendituresSource: BLS, U.S. Census Bureau, L.E.K. analysis

51%

66%

80%

92%

100%

25%

4%

25%18%

28%

13%

44%

18%

18%

7%

57%

32%

Number of householdsby income bracket

Spending as a portion of household income (before taxes)

Total consumer spendingby income bracket

$200K+$75-199K$50-74K$25-49K<$25K

Note: Households earning $75K+ annually make up ~32% of all households but account for ~57% of all expendituresSource: BLS, U.S. Census Bureau, L.E.K. analysis

51%

66%

80%

92%

100%

4%

25%

25%

18%

28%

13%

44%

18%

18%

7%0

10

20

30

40

50

60

70

80

90

100%

0

10

20

30

40

50

60

70

80

90

100%

0 50 100%

32%

57%

Figure 2 U.S. Consumer Income and Spending

Top 30% of Households Account for Nearly 60% of Consumer Spending

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Retailers that target these consumers will need to focus

strongly on value-based offerings to attract more buyers.

On the other hand, things are looking up for companies that

offer products and services in certain categories, provided

they target their offerings appropriately. For example, travel

companies may find opportunities in marketing to older,

wealthier customers, while home renovation suppliers may be

more apt to find customers in the middle income brackets.

Finally, traditional big box retailers, department stores and

other retailers will probably see sales continue to drop unless

they complement their in-store marketing with innovative

online strategies designed to attract customers across all

income levels and age groups. It is incumbent on retailers

to create new, engaging experiences as shoppers increase

their online and mobile shopping activity. While consumer

spending is moving in a positive direction, it will be tempered

by the fact that only 30% of households are driving spending

growth. Companies that study the trends and cater to specific

markets are the most likely beneficiaries.

Page 4 L.E.K. Consulting / Executive Insights Volume XVI, Issue 39

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