Housing: the Key to Recovery

October 23, 2009 - 14:58

For some time now, the housing market has been showing signs of stabilization. Not a robust recovery but an end to the “cliff diving” we saw in 2007 and 2008. This phase will be marked by ongoing price declines in many locales, albeit more gradual ones. We also will see a gradual stabilization in sales rates, a gradual decline in the level of inventory for sale and a gradual bottoming out of construction activity.

Again, though, the word to emphasize is “gradual.” The new home industry has done a good job of reducing supply, with inventory for sale now in line with the long-term average. But the existing home market is still vastly oversupplied, and we continue to be inundated with an glut of distressed and foreclosed properties (albeit at a slower rate). That means anyone hoping for a robust V-shaped recovery is likely to be disappointed. Still, we are seeing signs of improvement.

The real question is how the decline in housing values has affected consumer willingness to spend. It is on that point that most economists are mixed. The Wall Street Journal referred to two separate and differing studies in the same week, one indicating that “further de-leveraging of the household sector will likely keep a lid on any rebound in consumption. In other words, the future of consumption and house prices are closely linked,” and the other concluding that “while consumer spending may be sluggish in the near future for other reasons, it is doubtful that recent declines in home values will be a major contributor to this problem.”

So which study is true? I think they both are — it just depends on which sector of the economy you’re discussing. Obviously, in the green industry, we have historically found a strong correlation between housing and the demand for our goods and services. Consumers are, in general, saving more and spending less. Their investment in big-ticket items (including landscaping) has been preceded by intensive information gathering. In many cases, customers are purchasing in “incremental phases” and not biting off the entire investment at once.

Of course, this is being reflected in the home-improvement market as well, as reflected in retailers’ declining sales. The Home Depot reported sales for the second quarter at $19.1 billion, down 9.1 percent from the same period the prior year. Profit declined 7 percent to $1.12 billion. “Concerns about the housing market, rising unemployment and softness in the overall economy continue to pressure consumers,” CEO Frank Blake said. “Our business performed well in a down market; we captured market share and drove operating productivity. The combination made for a solid quarter relative to our plan.”

Lowe’s reported net income of $759 million for the second quarter was a 19.1 percent drop from the same time a year ago; this translated into earnings per share of 51 cents. Sales dropped 4.6 percent to $13.8 billion, and fell by an average of 9.5 percent in stores open at least a year. Lowe’s management blamed the bad quarter on shaky consumer confidence, bad weather and a harsh comparison to last year’s quarter, when consumers were prodded into the store by a fresh influx of federal tax rebate checks. But CEO Robert Niblock said in a statement that there are signs of a bottoming-out in housing and the economy at large, and the company expects the DIY market to begin recovering.

Eight Consumer Reactions

To analyze how the economic downturn is affecting consumers, Nielsen created a segmentation that divided households into groups based on their behavior and reaction to the decline. The recession analysis grouped consumers into eight segments.

Recession indifferent: Those who do not alter their purchasing habits at all.

Recession insensitive: Only slightly affected by the downturn and will cut back on spending for luxuries such as entertainment and dining out.

Switch to private label: Tend to be younger, larger households known as “young, bustling families” and often represent plain, rural living. They buy generic brands or store labels.

Light coupons and sales: Typically represent older and smaller households who take advantage of light coupons and sales.

Stock up and save: Generally older couples who live in a comfortable affluent situation and are known as “empty nesters.” This group remains loyal to name brands, but depends on coupons and sales to stock up while they can.

Switch stores for best deal: Consumers who typically live in cosmopolitan centers and will switch stores looking for the best deal.

Brand disloyal/promo sensitive: These consumers will switch from name brands to generics or brands on sale looking for the best deal.

Panic stricken: Those who take drastic action to greatly reduce living expenses and do whatever it takes to save.

Interestingly, income alone does not have a direct correlation with the economic impact segmentation. More than half (57 percent) of the “stock up and save” consumers earn more than $50,000 per year, compared to only 47 percent of the those in the “recession insensitive” group. Likewise, a higher percentage of people with lower incomes are in the “switch to private label” group than in the “panic stricken” segment. Other characteristics such as household size, age and location are also factors in consumer’s ability to tolerate a recession. Which is why trying to reach “recession indifferent” consumers with marketing efforts that target higher income groups is probably not efficient.

Bottom Line: Quality of Life

The value proposition for growers in the future must focus on the unique ways they can improve their customer base’s quality of life. There’s been a lot of research that validates our thoughts on the benefits of flowers, plants and trees. Green industry products improve emotional health, boost seniors’ well-being, enhance hospital recovery rates, enhance employee innovation and idea generation, strengthen feelings of compassion, decrease worry and anxiety, express feelings of compassion, build stronger communities (e.g., America in Bloom), mitigate environmental externalities and improve the value of homes — to name just a few of the benefits.

I cannot overemphasize the importance of this quality of life message, particularly in focusing future differentiation strategies. Whether you’re a member of the baby boomer, X or Y generation, quality of life is a higher-order need that is important to you. For example, although the economic downturn has increased anxiety on the part of baby boomers about retirement, they are nevertheless proactive in seeking innovative solutions to dealing with age. They view their new stage of life as one of activity and fulfillment rather than idleness. Gen X is the most “time-starved” generation, often juggling career and family obligations, but they maintain a strong commitment to work-life balance. The Y generation is just beginning their adult lives and facing lots of firsts: jobs, homes and, most importantly, independent incomes. They are trying to find the right balance between spending for necessities and spending for entertainment. This generation is concerned not just with function and utility but also style.

All of these generational attitudes come down to one thing: enhancing the quality of their lives. Our industry research shows that there’s no better way for consumers to do this than by surrounding themselves with flowers, plants and trees. All we have to do now is convince them of this and help them see our products and services as necessities instead of luxuries. And this will, of course, make us even more recession resistant in the future.

About The Author

Charlie Hall is Ellison Chair in International Floriculture in Texas A&M University’s department of horticulture. He can be reached at charliehall@tamu.edu.

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