Is Price the only ‘P’ that Matters Now?

As consumers and retailers settle into the new frugality, IRI reported last week on the emergence of a new generation of Americans – the Downturn Generation. As shoppers, this generation is adopting practices similar to Depression-era shoppers, implemented both to weather the recession and to keep a close eye on spending long after the recession ends. This marks a dramatic change in how consumers shop and what they buy.

When people lose their jobs, they value their time differently. In today’s economy, convenience-based value propositions are losing their appeal as people are repricing their free time. In fact, IRI found that “65% of shoppers reported that price is becoming more important than convenience in their purchases."

But how do they know when a price is a good deal. In conversations with homeowners in December, it was clear that they are well-aware of the current price of items they buy regularly. Under those circumstances, consumers are generally able to evaluate an offer, and know when they are being overcharged. This may be changing.

A recent NY Times article about today’s consumer mindset the title of which says it all: “Never Mind What It Costs. Can I Get 70% Off?” The point of the story is that consumers are numb to 50% off offers, giving rise to a vicious cycle of discounting to motivate a purchase. Trouble is, this type of downward price spiral does not build loyalty. In fact, it’s the opposite of loyalty – it rewards customers for being fickle. And it requires retailers to reorient their value chain to make up for what they lose on the top line by selling more. While many have famously claimed “we’ll make it up on volume,” few have actually succeeded.

Enter Starbucks into the fray. The brand that brought us the idea - if not the reality - of the Italian café experience, has been criticized for the high price of its lattes and is under siege from McDonald’s and Dunkin’ Donuts, among others. Last weekend, the retailer began a campaign to combat extreme price pressure and the media blitz behind McDonald’s McCafe launch. The campaign warns readers to “Beware of a cheaper cup of coffee. It comes with a price.” According to Starbucks CMO Terry Davenport and reported in an article in the May 1 issue of AdAge, “The ads lay out facts that separate Starbucks from the competition, such as its practice of buying fair-trade beans and providing health care for employees who work more than 20 hours a week.”

Are people today more sensitive to the need for worker benefits like health insurance? Do mass market consumers value the fact that Starbucks provides coverage to part time workers? Do they make the connection between the price they pay and the company’s ability to afford coverage? Two years ago, the answers would have been “no.” Starbucks is making us connect the dots between our values and our willingness to pay. It may give us a chance to see whether this recession has changed these perceptions. Kudos to Starbucks for trying.

We Are Where We Prefer to Eat

McDonald’s was an important part of our lives when our kids were young. We have the entire Disney collection of toys served with Happy Meals – in fact, the toy was the whole reason my kids ate lunch some days.

But it’s been years since we’ve gone to McDonald’s. Whether we’re on a roadtrip or closer to home, we shifted our allegiance years ago. I do see (and use) Starbucks as the Third Place, after home and work. So, a recent PEW Research Center report on their Social & Demographic Trends survey results caught my eye. They asked people whether they would prefer to live in a place with more Starbucks or more McDonald’s. While some of the differences are intuitive, some surprised me.

For example, I pretty much knew or suspected that the preference for McDonald’s goes up as income and level of education go down. And I was not surprised to see that Starbucks lovers are more likely to live in the West and to say they’re liberal.

What I did find surprising was that:

• In total, people would strongly prefer to have more McDonald’s around them than Starbucks
• Blacks and Whites have a clear preference for McDonald’s while Hispanics are nearly evenly split between the two brands
• 18-29 year olds strongly prefer Starbucks while all other age groups prefer McDonald’s
• Men strongly prefer McDonald’s and women are split evenly between the two

Besides suggesting that I have an outdated image of the McDonald’s customer, what else do PEW’s findings mean? Here are a few specific thoughts:

1. Hispanics: Starbucks has an opportunity to capitalize on its apparent strength with Hispanics. Are they doing anything about that? McDonald’s is surely trying to win them over.
2. Millennials: Taco Bell and Burger King may resonate more with millennials than McDonald’s. As a result, McDonalds’ weakness with 18-29 year olds may be because this group voted against them rather than actually voting for Starbucks.
3. Men: Starbucks has some shoring up to do with men. Do they know what men find lacking in the Starbucks experience? Does McDonald’s know why men prefer them to Starbucks by a 16-point margin?

More generally, it’s possible these results say more about which company’s stores people think would make a good neighbor than about where people would rather eat. While being a good neighbor doesn’t immediately generate revenue, it does build good will. And that can translate into revenue or a higher stock price over time.

Viewed in this way, the results say there is greater regard for what McDonald’s contributes to the communities it serves. Mickey D’s has been around longer, is known for its employee training, spreads the wealth through franchising opportunities, and has been more visible in the community through, for example, Ronald McDonald House. Taken together, these factors may explain why overall people would rather have more Golden Arches than Third Places in the neighborhood.