Deals At Retailers, Restaurants Appeal To Consumers' Frugality

USA Today declares: America has become a nation of penny pinchers.

The economic meltdown was the 500-pound catalyst, but even amid signs the economy is picking up, many of us still are pinching away. It’s a trend that analysts say reflects a seismic — and perhaps lasting — change in our spending habits, and retailers are responding.

Our demand for deals is forcing high-end retailers such as Whole Foods and Starbucks— whose growth symbolized recent boom times — to change how they do business.

Whole Foods (WFMI), the upscale grocer, now loudly touts weekly sales. Starbucks (SBUX), home to the $4 caramel macchiato, now also boasts brewed coffee for about $1.50. Morton’s steakhouse (MRT) now sells three mini-burgers at its bar for $5.

At a time when discounter Costco is seeing record membership renewals, Americans‘ appetite for bargains also is evident at neighborhood stores. Yogurt-maker Dannon is offering monthly bargains on best-selling products. CVS (CVS) drugstores have added kiosks that spit out personalized coupons.

Three years ago, 48% of consumers bought most products on sale. Today, it’s 53%, says NPD Group, a retail market researcher. Last year, nearly seven in 10 consumers shopped in a discount, big-volume or off-price store, compared with five in 10 three years ago, NPD says.

Those trend lines are growing stronger.

Consumer confidence numbers, although up slightly in February, “are basically at a level we’d associate with the middle of a recession,” says Ken Goldstein, economist for The Conference Board, a business management research firm. “You can entice some folks into fads like the iPad, but otherwise they’re going to balk at any increase in price.”

Another sure sign of penny-pinching: We’re socking away more cash.

The personal savings rate, which was 1.5% in the fourth quarter of 2007, more than doubled to 3.9% by the fourth quarter of 2009, the Bureau of Economic Analysis reports.

No one’s suggesting that the recession will have the impact of the Great Depression— which even today has many senior citizens turning out lights every time they leave a room or watching the clock during long-distance phone calls.

But clearly, even as the recession abates, consumers shaken and educated by it continue to stop, look and think before they spend.

“This is a trend that is marathon,” says Marshal Cohen, chief industry analyst at NPD Group. “Consumers are buying on need, not desire — and they’re trading down.”

Just ask Leigh Gostowski.

Gostowski, who lives with her three cats — Tigger, Cricket and Charlie — in Murfreesboro, Tenn., near Nashville, is an administrator at a local college.

Until the downturn, Gostowski spent years — and thousands of dollars — pampering her cats with the finest brands. Among other things, she would go online to order Newman’s Own Organics Premium Pet Food at $1.50 a can.

Toss in shipping costs, and she was spending more than $100 a month on cat food.

Once the stock market plummeted, “I couldn’t keep that up indefinitely,” she says. Now she pays 43 cents a can at Wal-Mart (WMT) for Friskies — less than one-third of what she used to pay.

The recession taught consumers their vulnerability, Cohen says. “They now stop and think about each purchase.”

It has changed the way we relate to consumption “in our hearts, our minds and our souls,” says Robert Thompson, professor of pop culture at Syracuse University. “Economic bad times in a consumer culture has become not only an economic adjustment, but a theological and ethical one.”

Says Cohen, “Conspicuous consumption has become abnormal.”

Gostowski says that before the recession, she was a “recreational shopper” who’d spend at least $200 every weekend on clothes at stores such as Macy‘s (M) and Dillard‘s.

“That’s completely changed,” she says.

She has virtually stopped going to the mall. She’s joined two book clubs and a needlecraft group. Instead of shopping on weekends, she now gets together with friends from those groups.

“I know it will be a permanent change in my life,” Gostowski says, “because I enjoy it so much more.”

No more upscale shopping

Spending habits have changed at Sharnel McLeod’s home, too.

That’s even though McLeod, a public relations executive, and her husband, Randy, an executive, earn $250,000 annually. Once a Nordstrom (JWN) regular, she hasn’t gone there in two years.

“The pants that cost $40 at Express last just as long as the $160 pants I used to buy at Nordstrom,” says the Woodstock, Ga., resident. She has also stopped going to Ralph Lauren for clothes for her 9-year-old daughter, Makenna, and her 6-year-old son, Jack. Now, it’s Target (TGT).

“What kills me is when I think of all the money I wasted over the years,” McLeod says. “What was I thinking?”

Many of America’s largest retailers and consumer product makers are keenly aware of how many consumers are asking that question. Their responses:

•Supermarkets sling specials. When same-store sales fell 5% early in 2009, Whole Foods’ executives realized they had to change the image of Whole Foods as a budget buster.

“As our sales began to slip, that ‘Whole Paycheck‘ reputation was killing us,” says Walter Robb, company co-president.

Since then, Whole Foods has launched a series of one-day, three-day and week-long sales and posted big signs touting them. It created a magazine, Whole Deal, from which shoppers can clip coupons.

It worked. Coupon use at Whole Foods is up 325% over two years, Robb says. And same-store sales were up 2.5% last quarter from a the same quarter last year.

“I see this as a healthy reset,” Robb says. “Customers have stripped down their needs to the basics.”

At the other end of the spectrum, a record 87.5% of Costco’s members renewed their $50 annual memberships in the past year, CFO Richard Galanti says.

Sales at Costco’s (COST) U.S. stores that had been open for at least a year were up nearly 5% in the first quarter of 2010 compared with the same period last year.

“We don’t have a bunch of economists around here,” Galanti says, “but customers are not optimistic that things are getting better fast.”

•Restaurants cut prices. Earlier this month, for the first time, Denny’s — already regarded as a place for diners on a budget — rolled out a nationwide value menu. For $2, you can get a biscuit and gravy with hash browns. For $4, you can get all the pancakes you can eat. And for $6, you can get all the soup and salad you can eat.

“Everyone looks at the money they spend very differently than they did three years ago,” Denny’s CEO Nelson Marchioli says. “This generation is forever changed.”

In the depths of the recession, Starbucks saw its sales tumble as consumers began balking at the notion of paying $3 to $4 for some coffee drinks.

“We said then — and we say now — this is not a speed bump in the economy,” marketing chief Terry Davenport says. “It’s a fundamental shift in how consumers think about how they spend their money.”

The company has experimented with several deals, including a breakfast value meal. But the one that’s been the biggest hit with Starbucks’ customers has been its brewed-coffee price, which was about $1.70 but has been lowered on most varieties, in most stores, to about $1.50.

That might not sound like a big deal. But not too long ago, few customers associated Starbucks with $1.50 coffee.

At the upper end of the restaurant scale, Morton’s shuttered seven of its restaurants last year, leaving 76 outlets nationwide. Sales recently turned positive, but same-store sales tumbled 19.5% last year compared with 2008.

That helps explain why one of the most popular new deals at the chain known for its $50 steaks is $5 food and $4 beer at the bar.

“It doesn’t have to be $95 a throw every time,” says CEO Christopher Artinian. Folks can eat and drink at a Morton’s bar “for about 20 bucks.”

•Foodmakers aim promotions at those who buy the most. When Dannon yogurt sales started heading south in late 2008, executives discovered that consumers were responding best to promotions that offer special discounts when they bought in large quantities.

So Dannon upped the ante. After offering nine of its 10-yogurts-for-$6 promos in 2008, it increased to a dozen of the same deals in 2009 — priced as low as $5. And in 2010, it plans as many as 18 of the promotions, sometimes priced as low as 10 yogurt cups for $4.

The bulk-sale tactic has been more successful than simply lowering prices, says Eric O’Toole, senior vice president of sales.

It has also nearly doubled consumers’ use of Dannon coupons. The company put coupons in 10 Sunday newspaper inserts in 2009. This year, it plans 18.

•Retailers roll out deals. The most popular program at CVS pharmacy is its ExtraCare card, which gives customers credit toward CVS purchases each time they shop in the store.

CVS has distributed 64 million ExtraCare cards, making it one of the world’s largest loyalty-card programs. The 7,000-unit chain added a twist this month when it installed ExtraCare coupon kiosks in all stores. The kiosks spit out four or five personalized coupons based on past purchases.

“Customers want us to help them pinch pennies,” says Bari Harlam, CVS’ marketing chief.

Few see the need for penny-pinching more clearly than Steven Tanger, CEO of Tanger Factory Outlet Centers, the nation’s second-largest developer of outlet malls.

“In good times, people like a bargain,” he says. “In rough times like these, they need a bargain.”

Sales at Tanger’s stores that had been open for at least a year were up 4.3% in the fourth quarter compared with the same period in 2009.

For many folks, says pop culture guru Thompson, pennypinching has always has been a way of life. For others, it won’t be permanent.

“A lot of the belt tightening will go away relatively quickly,” he predicts.

Wells Fargo bank thinks otherwise. It has put up billboards in Northern California that proclaim: “Saving is the new spending.”