It’s Still a Renter’s Market, Office Landlords Learn

By TOM ACITELLI

Last February, Bloomberg L.P. signed a 400,000-square-foot lease at 120 Park Avenue. Wells Fargo had originally scouted the space, but Bloomberg offered a higher rent, making one of this year’s biggest office deals. It was a sign, commercial real estate brokers said, that the Manhattan office market was tilting in landlords’ favor again.

With tenants competing for space, it would not be too long before rents, tempered by the recession, would rise and incentives for tenants, a staple of the office market since the credit crisis of 2007, would recede significantly.

But that conventional wisdom has largely proved wrong. While Manhattan office rents have indeed risen since the recession and leasing activity has picked up, tenants can still command several months of free rent and allowances of many dollars a square foot in improvements to their space.

That is because, given the economic uncertainty at home and abroad, brokers say more tenants are deciding to sit tight rather than expand or move their offices.

Where tenants might have gotten perhaps 10 to 12 months of free rent upfront in 2009, they are now getting six to eight, commercial brokers said. Where landlords might have put up $65 to $70 a square foot in allowances for tenants to improve their spaces, they are now offering $55 to $60.

“It started to look like the tables were going to turn,” said Michael Cohen, the president for the tristate region for the real estate broker Colliers International and an owner of Class A and B office space in Manhattan. “What actually happened was we hit this newfound financial crisis. Instead of the tables turning, they hovered.”

For much of the last decade, Manhattan office rents seemed to only ascend, reaching well over $100 a square foot in some trophy properties, like the Bank of America Tower at 1 Bryant Park and the Seagram Building at 375 Park Avenue. Hefty incentives were largely unheard-of, as companies buoyed by the growing economy were expanding their offices or upgrading, and willing to pay top dollar to do so.

The average net effective rent — taking into consideration the tenant incentives that in varying degrees have long been part of the office market — was $69.48 a square foot in the first few months of 2008, according to research from the brokerage firm Cushman & Wakefield. By the end of that year, after the collapse of Lehman Brothers, it was $58.97. At the start of 2010, the net effective rent for Manhattan office space was $40.54, a drop of more than 42 percent from two years before. By the middle of 2011, it had edged up only about $7 a square foot.

And some tenants, suffering financially but still bound to a lease, put up space for sublease, further depressing rents. By early 2009, sublease space accounted for more than 27 percent of available office space in Manhattan.

“At the same time, we also had very large blocks of space, 100,000 square feet or greater,” said Mitchell Konsker, a vice chairman of the broker Jones Lang LaSalle. “Between both the softness in the sublease market during the recession and the large blocks of space, that put a lot of pressure on landlords to lower rents to be competitive.”

The economic tumult also meant more renewals and fewer new leases. Cushman & Wakefield’s research shows that 8.6 million of the 34.9 million square feet leased in 2010 came from renewals, the highest amount since at least 2004 (in 2005, for instance, renewals accounted for barely three million square feet of office leases).

“In the depths of the recession, what most tenants did was hide,” said Howard Fiddle, a vice chairman at CBRE Group Inc., “and there were very few relocations because tenants didn’t want to spend any capital at all and they didn’t want to make any long-term commitments.”

When leasing activity did pick up this year, it smacked into a fresh crop of bad economic news, including financial services layoffs in Manhattan and the debt crisis in Europe, not to mention ongoing high-stakes budget talks in Washington.

Landlords, according to brokers, will have to keep offering incentives to skittish tenants, however incrementally less generous than before. (Several prominent Manhattan office landlords declined to comment for this article, though they did not dispute that they were offering incentives greater than those offered before the recession.)

Brokers said recent deals with substantial incentives included the following:

¶ The Man Group, an investment management house, is taking a lease for 48,709 square feet for 10 years at 452 Fifth Avenue, set to close in the fourth quarter of 2011, at rents of $82 to $88 a square foot. But with at least 10 months of free rent and $75 a square foot for work on the space, the effective rent drops to $64.52.

¶ The banking giant UBS Financial Services leased 44,612 square feet for 10 years and eight months in 200 Park Avenue, in a deal that will also close in the fourth quarter. The rents there ranged from $70 to $75 a square foot. UBS received nine months of free rent and $60 a square foot for work on the space, clipping its effective rent to $56.99.

¶ The financial holding company Nomura Securities received $70 a square foot for work and 18 months’ free rent for its 897,000-square-foot, 20-year lease at Worldwide Plaza at 825 Eighth Avenue. Nomura’s rent effectively dropped to $38.42 to $42.69, from $46 to $63 a square foot.

Those incentives will continue, brokers said, until the Manhattan office vacancy rate reaches “equilibrium”— about 7 to 8 percent. Right now, the vacancy rate is around 9 percent, much higher than the 6 to 7 percent before the recession.

While New York’s commercial real estate market in the past might have lagged the overall economy by months, brokers said, the market now tends to react much more immediately, slowing or growing in a globalized environment. A debt crisis in Greece or a political debate in Florida can rattle an already jittery set of landlords and tenants dealing in the nation’s most expensive commercial real estate.

One potential stumbling block for New York is the possibility that financial services firms, now undergoing a rash of layoffs, will spill more sublease space onto the market. That could drive rents lower and incentives higher, as landlords of directly available space compete with the cheaper sublease space that is often already built out.

“I’m going to stick my neck out and say that I believe the current market conditions will persist for at least six months, and maybe as long as a year,” Mr. Cohen of Colliers International said. “But, as sure as the sun will rise, we will see tenant incentives return to shrinking — as I would have thought they’d be doing already.”

http://www.nytimes.com/2011/10/26/realestate/commercial/its-still-a-renters-market-office-landlords-learn.html?_r=1&ref=commercial

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Wal-Mart’s Profit Slips

Wal-Mart said Tuesday that its third-quarter profit took a hit as the retailer kept prices low to attract shoppers back to its stores.

The strategy did enable Wal-Mart to break a run of nine consecutive quarters where sales at stores open at least a year in the United States had declined. Wal-Mart said its domestic same-store sales increased by 1.3 percent, above its prior projections. That compared to a 1.3 percent decline in the same quarter a year ago.

However, profit fell 2.9 percent from a year ago to $3.3 billion, making earnings per share come in at $0.96, two cents below analyst expectations.

Excluding the effects of inflation, Wal-Mart’s domestic same-store sales would have increased by 0.6 percent in the quarter, said Jeff Davis, senior vice president and treasurer, in a call with reporters.

Executives said that while visits to Wal-Mart’s stores in the United States fell from the same quarter a year ago, people were spending more per visit. Net sales for the country increased 2.7 percent to $63.8 billion.

The improving sales do not reflect a rebounding American consumer, though. Executives said the low- and middle-income shoppers Wal-Mart goes after are still under heavy budget pressure. They said Wal-Mart was bringing in a wide assortment of merchandise and keeping prices down to try to get them to spend.

“Our core customer was still impacted by high unemployment and continued uncertainty over the economy, leading to declining consumer confidence,” said William S. Simon, president and chief executive of Wal-Mart United States, in a recorded message, and that helped define Wal-Mart’s tactics.

“Cost increases in numerous categories were not passed on to our customers in the form of increased prices,” he said. “Our customers are still feeling pressured to reduce expenses wherever they can.”

A few indications of that pressure: Mr. Simon noted that layaway, which Wal-Mart began offering in October for certain holiday items, had been more popular than the retailer expected.

“Customer feedback on the return of layaway has been overwhelmingly positive and layaway transaction volume continues to exceed plan,” he said. “It’s a great way to help families on a budget shop for Christmas.”

Also, the retailer has seen some shoppers simply stop buying in categories that had gotten too expensive, such as produce, dairy and meat.

Mr. Simon said that inflation in those categories had risen about 4 percent during the quarter, though Wal-Mart had not passed on the full amount to its shoppers.

“In areas of higher price inflation, if a customer does not have a trade-down opportunity, they might just trade out,” Mr. Davis said.

Mr. Davis said Wal-Mart continued to see shoppers spending as soon as they received their paychecks, and to decrease spending as they got farther away from the paycheck dates. That suggests the shoppers do not have a lot of savings to help them out.

“Going forward we really would not expect anything different,” Mr. Davis said.

Michael T. Duke, the chief executive of Wal-Mart, said in prepared remarks that “customers remain concerned about jobs, and only one in 10 Wal-Mart moms that we surveyed view the state of the U.S. economy as good. They want to save money. They’re juggling credit cards, using coupons, and skipping restaurants and vacations. There is a real sense that the economic strain is taking its toll.”

http://www.nytimes.com/2011/11/16/business/wal-marts-profit-slips.html?_r=1&smid=tw-nytimes&seid=auto

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Retail Revitalization

Use these tips to increase the value of shopping center investments.

by Jim Conway

Increasing a retail property’s value is what investing is all about. And, today’s savvy investors aren’t waiting for inflation to push up the value of their properties –- they are seeking creative ways to improve their assets’ financial health. From cost-effective upgrades to reducing common expenses, these tried-and-true tips can help to improve a retail property’s value in any market. 

Upgrade Zoning. Investors can utilize market lulls to investigate rezoning options. For instance, I applied for and received rezoning approval for land my company owns in suburban Atlanta without having a potential user in-hand, a process that took about nine months. The property taxes won’t increase because they are based on the land’s usage, not the zoning. As a result, I now have a piece of land available for a potential developer that otherwise would have been held up in the rezoning process.

Maximize and Maintain. Take advantage of all available signage and consider implementing other head-turners such as murals to draw attention to the property. In addition, ensure the property is meticulously maintained. For recurring maintenance items, keep an annual calendar and follow up regularly. Keep in mind the basics, such as making sure your property has the market’s nicest and neatest landscaping. These small details are very important to tenants.

Tackle Tenant Needs. Take a proactive approach by meeting with tenants, listening to their concerns, and providing reasonable improvements to increase their satisfaction with the property. Requests may be as simple as increasing the size of the Dumpster or paving space for another few parking spots. Retaining an existing tenant is almost always more productive than getting a new one.

Seek High-Quality Tenants. Consider this example: If a property has a well-respected bank tenant and a nearby property has a local restaurant with identical rents and terms, more than likely the bank tenant-occupied property will be given a higher market value. Why? The bank is perceived to be a higher-quality tenant with lower perceived risk. Property renovation -- even at a substantial cost -- almost always becomes cost-effective because it allows the property to obtain higher-quality tenants.

Evaluate Rental Agreements. If tenants are successfully increasing sales, consider installing a percentage of sales rent clause that kicks in above a specified sales level. Three percent of additional sales is typical. Ask for periodic sales reports to gauge the tenant’s financial health. If a tenant vacates, past sales reports can be very useful when working to obtain a replacement.

In multitenant retail buildings with chronic vacancy, take a closer look at tenant improvement allowances and rent concessions. As much as 50 percent of the expected rents received would be reasonable for TIs and RCs on a short-term lease to land a good-quality tenant.

Plan to Expand. Single-tenant buildings with unused land on either side may be ideal for an adjacent build-to-suit tenant. Of course, lease terms and competition clauses for both tenants must be considered. Yet with proper zoning, land, and paved parking in place, costs to add new space will be much less than all-new construction. Price the rent for the new space to more than cover the cost of the addition, thereby increasing the value of the original investment. In most cases the additional foot traffic will benefit the original tenant and result increased sales.

Consider Cell Towers and Billboards. If your property meets a cell tower’s needs and the tower doesn’t cause a problem for existing tenants, tower operators can provide steady rental income of $800 or more a month. Though permitting for billboards usually isn’t easy, these additions typically pay the land or property owner about 20 percent of expected lease income through a land lease after installing the billboard. Investors can opt to own and rent billboards as well. A billboard costing $75,000 to build can command $1,500 per month or more on each side in high-traffic locations.

Appeal Taxes and Refinance. With property values declining in nearly all parts of the country during the last three years, tax valuations should have decreased as well. If a property’s taxes haven’t gone down, consider appealing them. Appeals are usually scheduled for the early spring and may result in multiyear reductions. For example, tax valuation reductions in Georgia resulting from an appeal are locked in for three years. If a property is performing well, owners can also explore refinancing. The economic downturn has resulted in a decline in loan demand for most lenders. Some are actively looking to take borrowers away from competitors, so it may be cost-effective to shop around for the best deal.

Jim Conway of Jim Conway LLC in Roswell, Ga., has more than 30 years of commercial investment real estate experience.

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Retailers' 15 Most Annoying Habits: Readers Speak Out

As the U.S. economy limps out of recession, retailers need to fight for every dollar. But the tactics they use to get customers to spend extra are clearly wearing thin.

We asked our readers to tell us what tricks of the retail trade they find most annoying -- and we received nearly 350 submissions. One thing is clear: American shoppers are getting wise to the sneaky ways stores get you to buy more, especially when it comes to promotions, sales and discounts.

Here are the 15 sales-boosting techniques our readers hate most:

Bulk Buying Required
The biggest complaint in our informal survey concerns the increasingly common practice of requiring shoppers to buy several of the same item to get a discount. That might take shape as an offer to, "Buy 10 for $10" in the supermarket. But what if you don't want 10 packages of pasta cluttering your pantry? Writes one respondent, "If you only need one, that's no sale at all." Clothing stores often offer, "Buy two, get the third free" deals these days. Many of our readers would rather buy one for a 30% discount. "I don't want to 'save money' by buying three of them," writes one. "GGGRRRRRRRRR!!!!!!"

Bulk Buying Suggested -- But Not Required
Almost as annoying as the bulk-buying requirement is when store signage suggests you need to buy multiple items to get the sale -- but you don't actually have to. In fact, in the above example, you might very well be able to buy one box of pasta for $1 even though the sign says $10 for $10. Writes one reader: "I think it's a cheap and shoddy trick on the part of the stores."

Up-Selling at the Register
This tactic came up over and over again in different forms. When buying electronics, no, customers don't want the warranty (in fact, the pitch makes them think twice about buying the item. Is it likely to be defective?). When getting a soda at a drive-through window in a fast-food chain, no, they don't want an apple pie. At a clothing store, no, they don't want the high-interest rate store credit card. And, in bookstores, no, they don't want to contribute to charity.

Our readers were sympathetic to store employees who they know are required to up-sell. One respondent who works in retail explains: "We are not allowed to deviate from this script, and if we do, we're reprimanded." Still, they lament, "In a convenience store, I want the cashier to ring things up I need in a hurry," one writer reports. "Stop pushing things people don't want."

Bait and Switch
This is a time-honored retail sales tactic, and customers find it as annoying as ever. We received numerous reports from shoppers who identify a deal from a circular or newspaper ad, rush to the store -- and the item is already sold out. The "helpful" salespeople are always quick to suggest a more expensive alternative than the original deal. Explains one reader: "For that item there is little if any in stock, but next to it are the more expensive items the store really wants you to buy."

Too Much Fine Print
Our readers are getting quite tired of the complexities of discount offers and promotions. Several respondents gave examples of times they brought coupons to a store, picked out items and were told at check-out that the item is excluded from the sale. One reader vents:"You have to be a bloomin' lawyer to get that fourth 12-pack of Pepsi for 'free.'"

Rebates
Need we say more? Not only are they a bureaucratic nightmare, but stores count on many consumers forgetting to mail in the documents. This frustration was common: "I always seem to miss the mail-in rebate somehow. So 'free' is never free for me. Not at all."

Mispriced ItemsReaders say they frequently find that the price listed on the shelf -- or even on the item itself -- is lower than the price rung up at the register. Many think stores do this on purpose, hoping customers won't notice or bother to complain. "I want it at the cost that was marked," says one reader. "Get the manager."

Item in Front of the "Sale" Tag on the Shelf Is Not on Sale
This is a corollary to the mispricing complaint that's no doubt familiar to supermarket shoppers everywhere. You pick out a certain brand or flavor of an item because a shelf tag proclaims it's on sale. But then you get charged full price at the register because it was actually a related item that was on sale. Our readers think stores must hope customers will just buy the full-price item. Laments one reader, when the sale is for cranberry juice cocktail, "Why is the sign always in front of the 100% juice? I know why. Creeps."

Telling You How Much You "Saved"
Many readers find it annoying that, as they're paying their bill, the cashier will often tell them how much they supposedly saved by shopping there. "That I call insulting your intelligence," says one commenter. Even worse, another reader notes that when you turn down the much-despised store credit card offer, the salesperson will sometimes say, "'You could have saved X dollars if you had our card.' It's like you're a child, and they're scolding you."

Putting a Coupon on the Receipt
These deals often require another trip to the same store in a week's time to take advantage of this new deal. One reader complains: "So to save $10 dollars using the certificate, you must return to the store, spending time, gas and mileage added to your car, and then spend another $50 dollars or more. This circle is vicious!"

Constantly Rearranging the Shelves
Shoppers want to find the item they came for quickly. Yet stores often rearrange displays as a way to get customers to scan more shelves. One reader writes of a retailer that was constantly moving items so she couldn't find the one brand of shampoo she was looking for. "I realized they were trying to get me to look at everything every time I went in there so I would be tempted to buy more. I stopped going there." Another reader came up with a name for the supermarket version: "I call this the 'Hide the Groceries Game.'"

Cheap Items Are Hardest to Reach
Readers lament that stores put expensive brands at eye level and cheaper items near the floor, or in other inconvenient spots on the shelves. "I dislike having to always look on the lowest shelves in a super market for the best prices," writes one respondent. "It would be nice to have them at eye level for a change."

Staples Are in the Back
A familiar complaint is the time-honored supermarket tactic of putting the most sought-after staples at the back of the store. "I hate it when they stick the milk, eggs, butter all the way in the furthest back corner of the store," writes one reader. "Then they put all that candy, gum, soda, and magazines at the register."

Putting Items Coveted by Children Near the Checkout
It's not only parents who hate this tactic. All shoppers have to hear small children cry and beg for items near the checkout that parents don't want to waste money on. Frequently they give in, to stop the embarrassing wails. Complains one parent: "Even if you manage to avoid the toy section while shopping with your children, they still manage to see something that they will want and throw a fit over not getting before you manage to get them out of the store."

Promoting Christmas Items Before Thanksgiving
Truth be told, this complaint didn't come up all that often in our reader survey. But it's a good one. Most shoppers don't want to deal with Santa in November. We bet if we'd waited a few more weeks, this pet peeve might have topped the list. When it comes to Christmas promotions, urges one shopper, "Let's get back to a reasonable time frame."

Readers provided us with lots of annoying tactics to choose from for this feature. So, thanks to our many contributors. And, given the state of the economy, we bet retailers are busy coming up with more annoying sales tactics. Look out for our next similar feature.

See full article from DailyFinance: http://srph.it/bk3DHv

In Times Square, at Least, Retailing Is Rebounding

By TERRY PRISTIN

Published: October 26, 2010

When the sunglass and sportswear maker Oakley wanted to expand its presence in Manhattan, it leased space last month on a busy corner that was swarming with tourists. To get that space, Oakley is paying $1,375 a square foot — what some luxury retailers paid on Madison Avenue’s choicest blocks before the recession.

But Oakley’s store, which will be 1,815 square feet, will not have a Madison Avenue address. Instead, it is at 1515 Broadway at 44th Street in Times Square, a neighborhood once known more for peep shows and prostitutes than astronomical rents. Yet three other retailers competed with Oakley for the space, said Jeffrey B. Roseman, an executive vice president at the brokerage Newmark Knight Frank, who represented the landlord, the S L Green Realty Corporation.

Not so long ago, stores in New York seemed to be emptying out at a rapid clip. Shoppers cut back on spending, making it difficult for many merchants to keep up with the high rents. At the same time, tens of thousands of square feet were added to the market as struggling retailers like Circuit City sought bankruptcy protection or others, like the Gap and Barnes & Noble, closed stores in New York.

Some of the gloom has lifted. Though unemployment in the city remains high — and the office market is showing only minimal improvement — retail leasing began picking up late last year and has been accelerating this year. The new tenants are dominated by apparel stores, including the Japanese clothier Uniqlo at Fifth Avenue at 53rd Street and the discount apparel store Century 21 in 61,000 square feet at Broadway and 66th Street that is currently occupied by Barnes & Noble. The five former Circuit City spaces have new tenants. Most recently, the food market Fairway leased space on 86th Street between Second and Third Avenues that used to house a Circuit City and a Barnes & Noble.

And in one shopping district, Times Square, the average annual asking rent of $650 a square foot is actually higher than it was in late 2008.

Brokers say business began improving when rents in many neighborhoods declined by as much as 30 percent — enough to persuade tenants that they were getting a good deal. “The landlords responded to a wave of creditworthy tenants,” said Gene P. Spiegelman, an executive vice president at Cushman & Wakefield. “They had secure cash flows in a time of uncertainty.” In addition, landlords have sweetened deals by giving extra months of free rent and contributing to the cost of building the store interior, brokers say.

Landlords have also become flexible in other ways, said Benjamin Fox, the president of Winick Realty Group. For example, he said, space on Third Avenue and 44th Street that was formerly leased to a card store sat empty for more than two years, but is now home to two restaurants, Le Pain Quotidien and Hello Pasta. “I don’t think that landlord ever contemplated having food there,” Mr. Fox said.

Though some retailers are taking advantage of the market, many others still cannot get financing to open a store, Mr. Fox said. “The activity has increased — no question about it,” he said. “But the velocity is still not what it used to be. There are still a lot of national chains sitting on the sidelines, in New York and elsewhere.”

Still, on the so-called Gold Coast of Madison Avenue, from 57th Street to 72nd Street, vacancies have dwindled to 20 from 30 since early last year, Mr. Spiegelman said. Because some space has been consolidated, the vacancy rate has declined only two percentage points from its peak of 13 percent at the end of 2008 and well below the 6.5 percent rate in 2006. The newest tenants on Madison include the Swiss watchmaker Vacheron Constantin at 64th Street, the boot maker Ugg at 58th Street and the lingerie store Agent Provocateur at 61st Street.

Though the average asking rent is about $841 a square foot, some deals were struck at $600 a foot early in the recovery, Mr. Spiegelman said.

A spate of new leasing has also occurred on 34th Street, between Fifth Avenue and the Avenue of the Americas. Among the new arrivals are the clothing stores Who. A. U. from South Korea and Desigual from Spain.

Though brokers are breathing easier these days, they say some neighborhoods are still hurting. The Flatiron District, on Fifth Avenue and Broadway from 14th Street to 23rd Street, for instance, is still riddled with vacancies. “Not everything has been coming back with great luster,” said Faith Hope Consolo, the chairwoman of retail leasing at Prudential Douglas Elliman.

The proliferation of bank branches before the recession swelled rents on stretches like Third Avenue on the Upper East Side to unrealistic levels because banks were competing for corner locations, brokers said. Now many spaces on the avenue are or will soon be empty. “A lot of leases came due at the same time, and the tenants chose not to renew,” said Gary Alterman, a senior vice president at Robert K. Futterman & Associates.

Desirable spaces on Third Avenue once commanded more than $300 a foot, but are now about $250, Mr. Spiegelman said.

But rents are rising in tourist areas like SoHo and Times Square. Sam Chandan, the chief economist for Real Capital Analytics, a New York research firm, said “the strong rebound in tourist traffic” was benefiting the retail corridors that attract visitors.

One gauge of SoHo’s success is the diminishing number of spaces for temporary, or “pop-up” stores, said Stephen Tarter, a principal of Tarter Stats O’Toole, a local brokerage. “A year ago, there were probably 20 spaces where you could put a temporary tenant,” he said. “Now there are about three.”

In Times Square, the “bowtie” section, from 42nd to 47th Streets where Broadway and Seventh Avenue cross, is the second-most expensive shopping district in the city, with an average annual asking rent of $1,000 a square foot, higher than before the recession, according to Cushman & Wakefield. Only the Fifth Avenue shopping strip north of 49th Street performs better, with an average asking rent of over $2,300.

For Oakley, which also has stores in SoHo and the meatpacking district, a berth at 44th Street and Broadway seemed ideal because the corner drew international tourists “almost 24/7” and the neighboring clothing stores, Aéropostale and Billabong, catered to a similar youthful customer, an Oakley spokeswoman said. “The co-tenancy is definitely desirable,” she said. Times Square has an advantage over most other shopping districts because the stores remain open late into the evening. In coming months, the real estate industry will be watching closely to see whether some of the razzle-dazzle of Times Square can be extended east. C. Bradley Mendelson, another executive vice president at Cushman & Wakefield, is representing the owners of three buildings on the south side of 42nd Street between Broadway and the Avenue of the Americas, including the Knickerbocker Hotel, the 1918 Bush Building and 1095 Avenue of the Americas — formerly known as the Verizon Building — where a new plaza is being built.

Mr. Mendelson says he hopes to create a destination on that block, with restaurants and stores that will bring new life to the street. Finding the right tenant for the corner of 42nd Street and the Avenue of the Americas will be crucial, he said.

“Everybody knows we could put a CVS on that corner or a Duane Reade,” Mr. Mendelson said. “But it would do nothing for that block.”

http://www.nytimes.com/2010/10/27/realestate/commercial/27retail.html

The recession has changed people’s shopping habits

“WE WON’T let up,” insisted Bob McDonald, the boss of Procter & Gamble (P&G), at the annual shareholder meeting of the world’s biggest consumer-goods firm on October 12th. He promised that P&G was still on track to have 5 billion customers by 2015. But it is a struggle for the maker of Pampers nappies and Fairy washing-up liquid. “Many of the economies in which we operate are still recovering from recession,” Mr McDonald admits.
P&G and its archrival Unilever, another global consumer-goods firm, had a grim time last year: profits plummeted. This year has been only slightly better. Economies are still ailing, and the cost of raw materials is climbing.
But there is something else happening, too. Basic consumer goods were long assumed to be more or less recession-proof. Shoppers may not be able to afford Dior dresses or Cartier watches, went the argument, but they still need loo paper and detergent. Yet people are finding ways to save money even on daily necessities.
They are shopping less and with more purpose. Some people deliberately pick up a basket rather than collect a trolley in supermarkets, to prevent themselves from buying too much. Some buy smaller packets, which are cheaper, or huge ones, which are better value. Many make do without air fresheners, hair conditioner and other fripperies once deemed essential. Many scour the internet for special deals. According to PwC, a consultancy, 93% of shoppers say they have changed their behaviour as a result of the economic downturn.




Many have traded down from name-brand to store-brand products. Alarmingly for, say, Kellogg’s or Heinz, lots have discovered that Tesco’s cornflakes and Wal-Mart’s baked beans taste no worse. A survey of 2,500 American households by Consumer Edge Research found that supermarkets’ own labels have become increasingly popular, especially for staples such as milk, peanut butter, bottled water and cooking oil. Trading down is most common among households with an income of more than $100,000 a year. (Poorer people bought fewer posh brands in the first place.) Store-brand goods are especially popular in Spain, the Netherlands and Germany (see chart).
Consumers are also trading down from one name-brand to another: for example, from Lindt chocolates to Cadbury’s. Some 18% of packaged-goods buyers switched from a premium brand to a cheaper one during the recession, according to McKinsey, another consultancy. Most said they found that the pricier brand “was not worth the money”.
Terrified consumer-goods firms have cut costs and slashed prices. P&G launched a less expensive “basic” version of its Tide brand of washing powder, but then withdrew it because it was too popular. Many firms are pushing “three for the price of two” deals and the like. Some see opportunities amid the gloom. As people eat out less, Kraft Foods, an American firm, sells more macaroni and cheese and other ready-made meals. As hedonists cut back on spas and beauty salons, P&G sells more beauty products to be applied at home.
Companies with a strong presence in emerging economies have the rosiest prospects. Shoppers in China and Brazil are trading up to foreign brands, making up for some of the new frugality in the West. Mr McDonald tries to sound cheery. In 173 years, P&G has survived many recessions. No doubt, but what if this one teaches consumers that supermarket brands are just as good and, when the economy recovers, they spend their extra cash on holidays or college fees instead?
http://www.m.economist.com/business_17258888.php