McKinsey: A progress report about the deleveraging process

Trend Observation:  Today’s newsletter from McKinsey takes a look at consumers’ progress in pairing-down their debt, a process widely known as deleveraging.  Click here to see the story.

Marketing Implications:  According to this analysis, consumers in the U.S. are getting a handle on their debt faster than some other parts of the world.  However, the study indicates that roughly 70% of mortgage debt and 80% of this deleveraging has come from default.  In other words, much of this “progress” has come from lenders writing-off the amount, rather than debtor’s paying-down the balance.  Further, up to 35% of defaults could be described as “strategic decisions,” where the debtor elected to walk away from a financial obligation.

The McKinsey paper seems to suggest that our deleveraging process will continue into the middle of 2013, but it might be over-simplifying the situation to suggest that means our storm of credit issues will be over.  Just because a consumer has little or no outstanding debt on their personal balance sheet does not necessarily make him or her a good risk; it could mean that someone else had to write-off an obligation that consumer once held.  If you sell big-ticket items where some form of credit often facilitates the purchase, this matters to you… and it makes qualifying your customers more important than ever.  (A process that can begin with the marketing message you create.)

Mike Anderson, for The Marketing Mind consumer trends blog, service of The Center for Sales Strategy

Cheating via checkbook: Insights on Financial Infidelity

Observation:  A story in today’s Marketing Daily explains that many people in relationships have kept a financial secret from their spouse or significant other.  The article shares some fun insights, and you can read the full story by clicking here.

Implications:   Humans are fascinating people.  

Another example of financial infidelity that I’ve used over the years is when someone buys a ($500 golf club, laptop, or other) big-ticket item, and pays for it partially with cash, partially on the household bank card, and partially with a credit card.  It is, in effect, laundering the household money so that a purchase is not easily traced.  When one describes this dastardly behavior in front of a hundred people in a consumer trends workshop… it’s funny how many people in the audience start to blush!

The difficulties that many people went through a few years ago—and the slow recovery they have been experiencing since—have imposed new financial realities on a lot of households.  In what could only be called a cultural consumer shift, many folks have denied themselves the kind of indulgences that were commonplace in the pre-recession economy.  It only makes sense that eventually, people would become fatigued, act on the idea of pent-up demand, and move forward with some small (and some not-so-small) indulgences.  Even if their partner might not know about it.

Have you made a purchase, or stashed some cash, without telling your spouse or partner about it? 

Are your customers thinking about doing it as they walk through your business?

Mike Anderson, for the Elm Street Economics consumer trends blog. A service of The Center for Sales Strategy, Inc.

An educated risk: Higher ed requires higher debt

Observation:  Last weekend, the New York Times published an in-depth story about the rising costs—and tremendous loans—many students are having to consider when pursuing a college degree.  Click here to see it.

Implications:   Deep in the story, these writers compare the current student loan crisis to the mortgage bubble… not because it holds the same potential to harm our greater economy, but because of the “education at any price” mentality that has prevailed in recent years, and because many students fail to realize the long-term consequences of tuition debt.

As I finished this story, I was left with several questions.  Is the U.S. at risk of a downgrade, in terms of its leadership position in education?  What kinds of jobs (indeed, what kind of an economy) await the less educated working population?  Will the academic world correct itself, creating more schools that focus on a specialty and fewer that offer deep programs in all subject categories?

This is a category that seems to be poised for a shake-up.

Mike Anderson, for the Elm Street Economics consumer trends blog. A service of The Center for Sales Strategy, Inc.

Consumers giving the recovery some credit

Observation:  A recent story from the Associated Press indicates that consumers are making greater use of credit.  In fact, the jump in use of credit in March was the biggest climb in a decade.  Click here to see the story as published by the Atlanta Journal Constitution.

Implications:   This is an important example of progress in our ongoing economic recovery, as consumers had such a dramatic aversion to credit during the recession itself. 

Credit is generally used when people feel confident that their employment situation and other household income factors will allow them to pay the money back.

Mike Anderson, for the Elm Street Economics consumer trends blog. A service of The Center for Sales Strategy, Inc.

Speaking of catering to the un-banked: Walmart.com has found a way to accept cash for online purchases

Observation:  As a follow-up to our story about banking earlier today (see immediately below), we were intrigued by this nugget from TechCrunch.  It explains that customers can “buy” items online at Walmart’s website, but then pay for that cart full of goods in-person at a Walmart store.  Click here to see the story.

Implications:   The TechCrunch story indicates that only around 15% of transactions in a Walmart store are paid for with a credit card.  If such a significant majority of purchases are paid with cash, it makes all the sense in the world to accept cash in the online channel of that store, too. 

Undoubtedly, there are folks reading this who are thinking, “This is nuts!  They’re forcing the consumer to physically visit a store to complete their online purchase!”  But undoubtedly, there are folks at Walmart who would answer, “That’s right.  And the problem is…?”

[Note:  Thanks to friend and colleague Matt Sunshine for tipping me off to the TechCrunch story.]

Mike Anderson, for the Elm Street Economics consumer trends blog. A service of The Center for Sales Strategy, Inc.

Financial: Banking on lower-income customers

Observation:  A recent story from the New York Times explains how some major banks are offering check cashing services, short-term loans and other services.  In addition to steep fees that allow the banks recapture revenue that was lost during post-recession banking reform, the services are often designed to help banks re-capture low-income consumers they had previously overlooked.   Click here to see the story.

Implications:   This blog has often referred to a cohort of consumers called, “the un-banked.”  Often, the people who fit into this group are simply younger consumers; those who might have an account or two with a bank, but who do not have a substantial relationship with their bank due to automatic deposit, automated or online bill paying services, etc.  (Perhaps it would be more accurate to say they have a bank, but not a bankER.) 

Another segment of the un-banked cohort was simply composed of lower-income consumers; those people who might not have the funds to invest in an IRA, money market or other investment account, those without the dollars to deposit in a significant savings instrument, and without the impressive credit history that stringent lending rules might require.  For years, banks were courting more affluent customers, and the un-banked were left to fend for their financial needs with check-cashing services and payday lenders.

It is worthwhile to note how times change.

Are there prospects and customers in your business that are being taken for granted as “secondary?”  Don’t get me wrong:  There is no rule against that, and I can make several arguments in favor of that.  But one might ask whether there is any scenario or shift that might alter the profile of your ideal target customer.  Are you continually talking with customers and monitoring industry trends so you can better anticipate such shifts?    

[Editor’s note:  For more on the un-banked, see these postings from July 2010, and April 2010.]

Mike Anderson, for the Elm Street Economics consumer trends blog. A service of The Center for Sales Strategy, Inc.

Healthcare providers get creative about collections

Observation:  Today’s New York Times includes a story about evolving debt collection practices used by various hospitals and healthcare systems.  Specifically, the article focuses on an investigation by Minnesota attorney general Lori Swanson into the practices of a company called Accretive Health.  Click here to see the story.

Implications:   As consumers read this story, surely they will be outraged at some of the tactics that are alleged.  (I must agree that it would be very disheartening to be greeted in an emergency room by someone who looked like a medical care staffer but who was really a credit services employee.)

At the same time, this article might be emblematic of a health care system that has become dysfunctional.  Private hospitals and clinics must do more than attract patients; they must attract patients who can pay.  Even those healthcare providers who are funded or subsidized in some way by the government or non-profit agencies are having a tough time making ends meet.

It is not my intent to start a conversation about the politics of healthcare, only to suggest that the mechanics of it—the business model—needs attention.  If you are a healthcare provider, could your dialogue with prospective patients (marketing) do a better job of explaining the mechanics of healthcare?  Would there be value in explaining the investment that has been made in staff, facilities, and years of training, in the interest of providing state-of-the-art care?  Should more marketing be done to attract “qualified” patients—patients who can pay—to off-set the number of unemployed or uninsured patients that a hospital might service?

There are too many questions to think that there is only one right answer.  But it appears that healthcare providers are prepared to consider just about anything.

Mike Anderson, for the Elm Street Economics consumer trends blog. A service of The Center for Sales Strategy, Inc.

De-leveraging process has made progress

Observation:  A story that will appear in tomorrow’s New York Times (available now at the NYTimes.com website) suggests that U.S. consumers and lenders have made tremendous progress in cutting debt.  A graphic illustrates just how far and fast credit liabilities and fallen, and the main story explains that while consumers deserve much of the credit for their self-imposed austerity, lenders, too, have speeded the process along with the amount debt that has been written off in the form of losses.  Click here to see the full story.

Implications:   During the recession of 12/2007 through 6/2009—or in the several months that followed—many pundits (and perhaps many families) wondered whether the U.S. economy could get out from under its considerable personal debt. 

It would appear that there is light at the end of that tunnel.  And that’s good, since the economy is fueled so heavily by consumer spending; spending that does not happen when consumers feel fear about their employment future or the pressure of outstanding debt.

Mike Anderson, for the Elm Street Economics consumer trends blog. A service of The Center for Sales Strategy, Inc.

The car comes first when it comes to paying bills

Observation:   An Associated Press story in today’s Minneapolis Star Tribune suggests consumers have re-prioritized the bills they pay.  The article is based on a study from TransUnion, and explains that while consumers used to pay their mortgage first, then the car loan and credit card bills… the vehicle loan has now taken the pole position over the mortgage payment.  Click here to see the story.

Implications:   There are lots of things going on in this story, in the form of lessons learned and adjustments made during the Great Recession.  First, the labor market placed a premium on transportation:  If you had a job, you needed reliable transportation to fulfill it.  If you were looking for a job, you desperately needed transportation to find it.  Even at risk of foreclosure, the car payment had to come first, because it is so directly connected to employment and thus, future prospects.

But coverage about the mortgage meltdown shed light on the whole foreclosure process, and trained many people that the “grace period” on a home loan might be more forgiving than a car loan.  The repossession process on a vehicle moves much more quickly than the foreclosure process on a home.

More than anything, this story does a great job of illustrating “Reconciliation,” the idea that after 19 months of recession—and the 32 months of recovery that have happened since—consumers have adjusted their financial behaviors to reflect their new collection of economic realities.  That’s a very personal process… and might look quite different from one home to another.

Mike Anderson, for the Elm Street Economics consumer trends blog. A service of The Center for Sales Strategy, Inc.

Consumer credit grows (a testament to increasing confidence?)

Observation:  A recent story from Bloomberg suggests that consumers may be feeling more confident about their future prospects, and therefore more comfortable with the idea of borrowing money.  Click here to see that story.

To see an interactive chart about credit trends, click here.

Implications:  If you sell big-ticket items—or loans—this is great news for your category.  Have you planned a messaging strategy that speaks to this increasing confidence (or at least, a greater willingness to borrow)?

Mike Anderson, for the Elm Street Economics consumer trends blog. A service of The Center for Sales Strategy, Inc.

Deciding where credit is due

Observation:  If it did anything at all, the Great Recession exposed flaws in the way both lenders and consumers decide how much debt they can handle.  Well, it seems that one consortium is about to expand the scope of financial behaviors that are scrutinized in the act of building a credit report.  Click here to see that story, which appeared in a recent issue of the New York Times.

Implications:   It has been suggested that many consumers have been working to shore-up their financial affairs, and be more careful with credit.  It would appear that lenders, too, will have better tools to gage their credit practices.

Mike Anderson, for the Elm Street Economics consumer trends blog. A service of The Center for Sales Strategy, Inc.

UPDATE: Moving Black Friday to Thanksgiving could make some retailers… late to the party

Observation:  Much has been written in recent weeks about the retailers who plan to open and offer their “Black Friday” specials a day early, on Thanksgiving Day.  There’s been a bit of pushback for companies who will ask their employees to sacrifice a family holiday for the chance to help the company rack-up a few more holiday dollars (click here for a sample posting on the topic).

Well, today’s Marketing Daily suggests that more than half of us have started shopping already.  Click here to see the story, which is based on data from BIGResearch that was done for the National Retail Federation.

Implications:    With consumers sticking to their methodical ways when it comes to spending, it only makes sense that they’d try to avoid cramming so much expense into a few short weeks of holiday shopping.  The earlier start to the season helps consumers spread-out the cost of the holidays… and use less credit along the way.  Think of it as a Do-It-Yourself layaway plan that the consumer is using to make gift giving more manageable.

Mike Anderson, for the Elm Street Economics consumer trends blog. A service of The Center for Sales Strategy, Inc.

Are banks lending money more freely where you live?

In spite of what we’ve been hearing for years with regard to tight credit markets, a story in today’s DealBook explains that many banks have returned to a more aggressive posture when it comes to lending money (especially where well-qualified consumers and businesses are concerned.)  Click here to see the story.

Implications:   The DealBook story seems to indicate that the recovery is still moving forward.  Are you seeing more big-ticket purchases in your market?  If not “exploding,” have categories like automotive, home furnishings and home improvements at least stabilized?  If you sell big-ticket items, are you seeing more people investigate the purchase… and qualify for financing?

Mike Anderson, for the Elm Street Economics consumer trends blog. A service of The Center for Sales Strategy, Inc.

Wal-Mart brings back lay-away

Another story from today’s Marketing Daily explains that the world’s largest retailer is returning to an old standby:  Offering lay-away.  Click here to see the story.

Implications:  According to the story, lay-away service was discontinued by Wal-Mart about five years ago.  Sears brought layaway back in 2008… after a twenty-year absence.

It’s an old idea that these retailers are hoping will appeal to consumers who still have an aversion to relying heavily on credit.  Are there any new (or old) ideas that could help you do the same?

Mike Anderson, for the Elm Street Economics consumer trends blog. A service of The Center for Sales Strategy, Inc.

Financing for used vehicles approaching the level for new vehicle

A story in today’s Automotive Digest hints that the sums a consumer must finance to purchase a used car is approaching the cost of financing a new car.  Click here to see the story, which originated at SubPrime Auto Finance News.

Implications:  The cash for clunkers program took a lot of used vehicles out of the market during the Great Recession.  At the same time, folks seeking to sneak by with spending less for a vehicle also placed strong demand on used vehicle inventories across the U.S.  It seems that these and other market forces have colluded to make it more expensive to buy a used vehicle, a thought that could drive more buyers to the “new” side of the lot.

Mike Anderson, for the Elm Street Economics consumer trends blog. A service of The Center for Sales Strategy, Inc.

Consumers remain somewhat credit-averse

A story in today’s USA Today suggests continued restraint with regard to the use of credit.  Click here to see the story.

Implications:  This is one of the major tenets of Elm Street Economics:  Consumers won’t just buy your product because you offer financing; they will consider financing because they want to buy the product or service you sell.  Sell the value that your product or service will add to the consumer’s life.  Then, if applicable, mention that you have cash management options to help them soften the expense over time.

If you think a financing plan is the most important part of your offer… you may not be on the same page with a significant number of your customers.  It's not that people won't use financing.  It is that they'll use it with considerable caution and deliberation.

Mike Anderson, for the Elm Street Economics consumer trends blog. A service of The Center for Sales Strategy, Inc.

Financial reform still far from a sure thing

In the midst of the Great Recession, certain investment banks and banking practices were cast as culprits of the financial meltdown; it was all the perfect fuel for legislative action and sweeping reforms in the banking industry.  But according to a story in today’s New York Times, many of those reforms are failing to gain traction, as the rulemaking phase of the process faces one delay after another.  Click here to see the story.

Implications:  While many consumers accepted personal responsibility for their share of the financial meltdown (the over-use of credit, taking equity out of their home, etc.), many consumers also felt that portions of the financial industry were at least partially culpable for many of the woes faced during the Great Recession.

If the reforms intended to remedy banking practices are now going stagnant, it could represent a strong opportunity for almost any financial institution, or any sales organization which offers financing or financial services as a part of the transaction:  Transparency.

Does your organization thoughtfully explain the pros and cons of any investment instrument or financing alternative you offer?  Do you promote that transparent communication in your marketing messages?

There is one thing will protect the consumer better than even sweeping banking reform (if/when it actually comes to pass)… and that is help in making an informed choice.  And that’s something you can offer now.

Mike Anderson, for the Elm Street Economics consumer trends blog. A service of The Center for Sales Strategy, Inc.

Loans for upscale homes could see reduced government backing

Legislative changes are being considered that could reduce or eliminate government backing for home loans of greater than $750,000, according to a story in today’s New York Times (click to link).

Implications:  These changes would directly impact upscale consumers, but it would also affect consumers who simply live in more expensive areas.

If your company targets an upscale audience, you’re not likely to hear the topic of real estate drop from the daily discourse anytime soon.  If the changes are enacted and loans for expensive homes become much more costly or difficult to get, one might expect that chasm between upscale and lower/moderate homes to widen… as cash regains its position as king among luxury home buyers.

Mike Anderson, for the Elm Street Economics consumer trends blog. A service of The Center for Sales Strategy, Inc.

Just as there were many different recessions, there are many different recoveries

As far-reaching as the recession was, it was not a singular event that treated everyone the same. The Great Recession was a very personal event, depending on the employment, housing, revolving credit and other financial dynamics of an individual or their family.

A story in today’s New York Times suggests that like the recession, the recovery will be a highly personalized matter, at least with regard to credit card use. Click here to read the full story.

Implications: I know people who regularly use their credit cards for necessities, but only because they like to rack-up frequent-flier points or other rewards. I know people who use cash, even for a major purchase. So blanket conclusions can be a dangerous thing.

But the fact is, a tremendous number of consumers have been trying to de-lever over the past few years. While some are again warming-up to the idea of using a credit card or financing a major purchase, it appears unlikely that we, as a society, will go whole-hog on another spending spree like the one that preceded the recession.

On the other hand, there are consumers who are using credit instruments every day, not out of want, but out of need.

In your business, does a “qualified customer” look the same in 2011 as they looked in 2006? What, if anything, has changed?

Mike Anderson, for the Elm Street Economics consumer trends blog. A service of The Center for Sales Strategy, Inc.

A surge in automotive, but who gets the credit?

Is it Detroit that is recovering? Or is it the financial industry driving the recent increase in automotive sales? Those are the questions asked (and answered) by a recent story in The New York Times. Click here to see it.

Implications: This is an important story to read if you sell cars… or appliances or furniture or office equipment or computers... or any other product that is frequently purchased with the help of financing.

This is important not just because it is a sign that financing is more readily available than it was even a few months ago, but also because it seems consumers are more willing to consider financing than they were just a few months ago.

Mike Anderson, for the Elm Street Economics consumer trends blog. A service of The Center for Sales Strategy, Inc.