SAGE Advice: The Katrina Effect on Year-End Spending

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By: Leo J. Shapiro and Steve Yahn

Christmas sales season prospects for the nation’s retailers, and their newspaper allies, looked bleak back in August. The percent of consumers planning to spend more for Christmas this year than last was down seven points year-to-year, from 27% in August, 2004 to 20% this August.

Then along came Katrina.

Within days, this murderous hurricane put the nation’s entire economy — and, indeed, the world’s — at the end of a long line of gasoline-related problems.

Will Katrina go on to dampen this year’s Christmas spending? A partial answer comes from a September national tracking survey from our Chicago-based Leo J. Shapiro and Associates, which has reached fresh samples of 450 consumers each month for the past 30 years.

The first day’s interviews in September reflected the initial shock of Katrina: a sharp deterioration in consumer mood, including Christmas spending plans. Interviews during the next two days showed substantial recovery from that shock as consumers in many parts of the country reflected on their good luck in having dodged the bullet of the catastrophe.

Miles E. Groves, former Newspaper Association of America chief economist and now head of MG Strategic Research, says, “It all comes down to the consumers, how quickly their psyches absorb the shock and resulting trauma that has unfolded in the wake of Katrina’s devastation.?

But retailers and newspapers should not lose heart. In past years, consumers changed their Christmas spending plans radically as the season approached. Much depends on how lucky consumers feel when the buying season actually begins. When consumers feel lucky, they spend freely.

Six in ten U.S. consumers — based on interviews with 1,800 people sampled nationally and surveyed between April and August — believe that there is such a thing as ?luck.? The percentage of all consumers who felt they were luckier than average jumped 15 percentage points from 19% in April to 34% in June before dipping to 30% in July and recovering to 32% in August.

The importance to the economy of these changes in belief about luck is underscored by the successive headlines of the monthly reports on How the Consumer Feels. They showed a jump from April to June in willingness to spend followed by a leveling off in July and August when worries about the future began to give consumers jitters. But the jitters were not severe enough to deter free spending.

In August, retailers and the advertising-driven communication media they support were riding a wave of active buying stimulated by the relatively high number of consumers who felt they were luckier than average — an attitude that accompanies risk-taking and free spending.
Consumers who felt luckier than average in August were markedly less inclined to curtail Christmas spending than those who felt less lucky than average.

Luck shows up in our surveys as a major influence, not only on Christmas spending, but also on a wide range of other behavior. Consumers who believe they are luckier than average act as though they can win against the odds. They are, for one, less inclined to cut spending to build cash reserves in anticipation of impending trouble.

The June 2005 survey shows that people who believe they are luckier than average have higher incomes than those who feel less lucky than average ($62,000 to $50,000).

Hubris stalks the lucky. Lucky people believe they can win against the odds and are inclined to take unwarranted risks. Specifically, those who feel luckier than average are more inclined to buy now to take advantage of today’s prices (25% to 10%) and borrow money to make a major purchase (43% to 35%)

Consumers felt okay in August and were spending accordingly. But, already, before Katrina, their unease about the future made them think they would feel worse, and should spend less, in the future. Six in ten thought that things are going worse for the nation — the second highest level this year. Only 42% said they were pleased with President Bush’s performance in office. Faith in the president is an important component of consumer willingness to take risks.

More people feel luckier when the economy is good, and some people feel lucky regardless of the economy. Either way or both, and hubris notwithstanding, good luck is something to cherish. And for retailers, lucky customers are always a blessing.

So, will Katrina — bad luck incarnate, especially for its direct victims — hurt retailers’ holiday sales season?

Our surveys from Christmas retail seasons past show that consumers’ plans for Christmas spending change as the holiday season draws closer, sometimes dramatically.
In August 2000, for instance, 30% of Americans surveyed said they planned to spend more for Christmas that year than in the previous holiday season. However, the percentage of people planning to spend more subsequently dropped to 25% in November before recovering to 28% in early December.

The reverse happened in 2003, when the percentage of people planning to spend more for Christmas moved up from 21% in August to 25% in early December.

One thing at this juncture this year is undeniable: the heavy toll inflicted by Katrina will require retailers and newspapers to be more innovative, ambitious, and more wide-ranging than ever before in convincing traditional and new customers to set aside short-term–and even longer-range– economic fears in order to participate to some degree or another in the joy of giving that will endure as a central part of the holiday experience.

Retailers must order inventory well in advance of the season. They must plan and buy advertising in anticipation of drawing customers. As the Christmas sales season wears on, retailers must use advertising to bring their store to the consumer, either to reap the bounty of lucky times or compete for the leaner offerings of unlucky times.

— As Christmas approaches, SAGE will chart and analyze holiday sales outlook trends and developments for both Editor & Publisher and at sagegrowth.com. Sagegrowth.com also regularly tracks a variety of other business-minded consumer behavior and media trends.

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