Tuesday, April 5, 2011

Putting us to the test

A much needed voice of consumer sanity is heard in this piece by Rick Newman for USA Today about Groupon:
Here's why I'm not interested: I don't want a daily temptation to spend money I should probably be saving. Sure, it's possible that Groupon would one day send me an offer on something I need to buy anyway, saving me a few bucks. But the main purpose of coupons and every other kind of retail come-on—whether delivered by catalogue, email, cell phone alert, or teleportation—is to separate consumers from money they'd otherwise put in the bank. Consumers don't need to be persuaded to buy things they need; the whole purpose of marketing is to convince people to buy things they don't need.

Marketers have done an awesome job of that over the last 60 years, convincing Americans to pay for homes, cars, clothing, gizmos, vacations, children's camps, and hundreds of other things that go far beyond what most of us require to live a satisfying life. They were so successful that for a while, Americans stopped saving money altogether, spending literally every dollar they had. That's great for the economy in the short run, but it leaves consumers saddled with debt and highly vulnerable if something goes wrong. The typical U.S. household, for instance, has racked up nearly $120,000 in debt. Some of that helps pay for basic shelter, transportation, and other necessities. But Americans have also borrowed money to pay for kitchen islands, cruises, BMWs, and closets filled with mall goodies. During the glory days of easy credit, it seemed like it could go on forever.

The recession ended that, and now Americans need to pay down debt and learn the forgotten art of living within their means. Marketers debate whether the "new frugality" is here to stay, or ebullient consumers will go back to their free-spending ways. But it's more a matter of simple math than a question of attitude. There are many reasons to believe it will simply be impossible to sustain the spending levels we've gotten used to over the last decade or two. For starters, banks will no longer lend money to anybody with a pulse, with many consumers only able to get credit at prohibitively high interest rates that curtail their ability to live on borrowed money. To buy a home these days, you need to save money for an actual down payment. Perhaps half of all baby boomers are unprepared for retirement, which means the most profligate spenders of the last two decades have little choice but to become big savers—unless they're willing to accept lower living standards during their golden years.

Forget about the government plugging the gap, since Washington has its own enormous debt problem. One recent study found that new taxes, which seem inevitable at some point, could reduce the typical American's disposable income by more than 4 percent. That could happen at the same time the government will have to extend the Social Security retirement age and cut back on Medicare and Medicaid subsidies, raising out-of-pocket costs for millions. Plus, the income-tax cuts passed at the end of 2010 will expire at the end of 2012, pushing taxes back up by about 3 percentage points, on average. Add it all up, and the typical family might need to cut its spending by 10 percent or more, just to stay even. [Emphasis added--E.M.]

Call me a killjoy, but it seems like a lousy time to be chasing daily deals on manicures or ├ęclairs, just for the thrill of the hunt. Sure, the economy is recovering, but it's not heading back to prerecessionary euphoria any time soon. Unemployment will probably remain elevated for years, and the housing bust that has decimated many Americans' net worth is still far from over. The next five or 10 years will probably be an era of slow growth, stagnant incomes, and digging out. Some Americans seem to realize this, one reason the savings rate has gone from nearly zero in 2005 to about 6 percent today. But that probably isn't high enough. Some economists think it needs to hit somewhere between 8 and 10 percent, and stay there for awhile, in order for Americans to properly repair their finances. If you could save 20 percent of your disposable income, you'd be smart to do it.

Read the whole thing here.

It's nice to think about saving 20% of one's income, isn't it? Sadly, that may not be an option for many people, since inflation has risen but wages have remained stagnant. According to the article at this link, what's really hurting consumers is the rising price of necessities, not of restaurant meals or spa visits: gasoline, up 19%, ground beef and butter increased by 10 and 23% respectively, all in the last year, to cite some of the article's examples. When the cost of living increases and wages remain flat, it makes even less sense to sign up for services that exist to tempt you to waste money on luxury items.

But American consumers, it seems, have always been suckers for that "good deal" that promises to save them money--even if they have to spend money to get the deal in the first place. Plenty of retail establishments, from grocery stores to department stores to electronics stores and so on, will even print at the bottom of your receipt the triumphant declaration: "You saved $23.61 today!" instead of pointing out that you just spent $87.54, and that the "savings" were really just a reduction in the store's already overinflated prices. A more honest receipt message would be "We failed to fleece you out of $23.61!" but I highly doubt any retailer would be that forthcoming.

The real trouble for many American families, though, is not that they are falling prey to clever marketers who want to sell them luxuries they can ill afford; the real problem is that the way things are going, as the piece by Rick Newman says, the average family might have to decrease their spending by 10% just to break even--that is, to compensate for rising prices, higher taxes, and stagnant wages. Families who are at the breaking point who can't even manage to save 10% right now, are going to be fighting to keep from going over the edge into financial ruin in the very near future. How prepared we'll be as Christians to help each other in the days that lie ahead may put the whole notion of Christian generosity and detachment to earthly goods to the test in many of our parishes and communities.


Erin said...

Amen, Red! I have specifically asked my husband (the IT guy in the house) to block "tempting" internet sites like Groupon, Woot, etc. Because every time I visit them, I keep thinkng, "Well, I don't really need it, but it's such a GREAT DEAL!"

It's just easier to flee temptation than to stare it in the face and try to fight it!

Siarlys Jenkins said...

Amen to all that... although I admit, as someone who enjoys cooking and is tired of working in a cramped little studio kitchen, I would like to have an island counter someday... if I can ever afford it.

I do use coupons and sales to purchase those things I would have bought anyway, or the slightly better variety of things I have to buy anyway, when the price is just a little bit more. But I'm going to switch my hamburger buying to Aldi's for the forseeable future.

If I haven't saved at least half as much as I spent, preferably the same as what I spent, I feel like a failure.

melanie said...

You guys are making me feel better. Lately I've been feeling a bit guilty for not using coupons. But the big reason I don't is because they are never on things I would normally buy. I don't want to shop around coupons. But there's this new show coming out called extreme couponing and people "save" so much money. But if you just have to buy crap in order to save money I can't do it!
I wish I could save as much or even half as much as we spend. That's kind of a great idea. Don't know if it's doable though.

melanie said...

PS it's a good thing I preview my comments. My iPhone changed "extreme couponing" to "extreme coupling" LOL stupid iPhone

Deirdre Mundy said...

Actually, I LOVE groupon--but I joined specifically for a deal 60% off membership to a science museum that we were going to join anyway.

And, because we go up to Chicago, I keep an eye out-- for half off somewhere we were planning to go anyway...

But we're pretty disciplined about our entertainment budget... OTOH, Walmart and Target are my downfalls.....

JMB said...

For the past three years my family has been in pinch mode. One of the first things that went out the window was Costco membership. I know this sounds heretical to some, but I found that if I just bought what I needed when I needed it, and only ONE of it, I managed to stay on budget. I also curtailed my Target and Walmart runs because I'd go to buy some cleaning supplies and come out with workout clothes, bathing suits, shampoo, makeup, shoes, you name it. I couldn't get out of the store without dropping 2 bills. So now if I'm out of detergent, I buy whatever is on sale at the supermarket. I don't buy any more or less.

Anonymous said...


Grocery stores (not the big box retailers that carry groceries) make a profit margin of 1%, on average. That's right. One penny out of each dollar is net profit.

When we put a product on special, it is because the producer gave us a TPR (temporary price reduction) at the wholesale level. We pass that along - we do not just take a hit to our "overinflated prices" for a week or two.

Did you know that when a customer breaks a jar of a food product, s/he has just wiped out the grocery store profit on the whole case of that product? We skate on a very thin margin.

Coupons are also paid for by the manufacturer. We are repaid the face value of the coupon plus 8-cents to pay for all the labor we put in to redeeming them.

After the wholesale cost of the products, our biggest expense is labor. We pay a living wage and provide health insurance with very low employee contributions (none at all for long-time employees) and we pay 1/2 the spousal or family premium. Then there are all the other costs that only go up - prices on rugs and software and power bills and property taxes and plowing services and landscaping/gardening and parking lot resurfacing and roof repair and cleaning and supplies and trash/recycling haulage and insurance...

It is not fair to make such blanket statements about an entire business sector out of sheer ignorance. We do not fleece our customers. We try to provide the best service and products we can. We work hard to keep our expenses in line so we can keep prices competitive.


Red Cardigan said...

Elizabeth, I find your comment interesting, but I'm not sure if it's true in every region/of every chain grocery store. If it were, I don't know how any of them would remain in business at all.

If a jar of spaghetti sauce is about $2.00 at my local big-box grocer (not a warehouse club) and the two chain grocery stores in my area are selling the same sauce for $2.79 and $3.09 respectively, is it really the case that the manufacturer is charging the two grocery stores so much more for the sauce then they are charging the "TarWalGetMart" stores that they simply can't afford to compete?

If so, that's sad--but not the consumer's fault. And the consumer can rarely afford to spend about a dollar more on each item in order to support the local grocery store, either.

Here's the thing: that sauce isn't a "special deal" or a "coupon sale" or a loss-leader at the TarWalGetMart. I know this, because the price is *always* about $2.00 (I think it's $2.04, but I'd have to check a recent receipt). When the box store puts the sauce on sale, it's below $2.00 (and then it may be a loss-leader, for all I know). But I doubt the big-box store can afford to lose a dollar an item all the time, either.

And even if the grocery store has a "special sale" that puts the sauce right around the $2.00 mark, I still can't afford to shop there, because my groceries will cost anywhere from $30 to $50 more than they will cost at the big box because everything *else* is more expensive.

What am I missing, here? I'd be interested to hear from someone who knows the industry on the inside.

Derrick said...

Isn't all this really relative?

If someone is not a very good provider for his or her family, of course even the cost of basic groceries becomes daunting. That's sad, especially for the family who has no other choice but to make do with what they're given to survive on, but it's hardly the grocer's fault.

Keep in mind that Americans enjoy some of the lowest food prices as a percentage of their incomes of any peoples in the world.

Red Cardigan said...

Derrick, there are 13.5 million unemployed Americans right now, with an unemployment rate holding at 8.8%. Plenty of "very good providers" have ended up not being able to provide at all, in the last couple of years.

And anyway, even wealthy Americans don't go to the crowded little grocery store with its high prices and limited selections. You don't get to be wealthy by paying a dollar more for spaghetti sauce than the going rate in your area. Part of being a good provider is being a good steward, you know--and that means being a thrifty consumer as well.

Siarlys Jenkins said...

When prices fluctuate as much as they do, SOMEONE in the supply chain is taking a sufficiently fat profit that they can afford to forego half of it in order to periodically give us "great deals." I can well believe that is somewhere in the wholesale links, not the final retailer.

One way ALDI keeps it prices down is by not selling name brands. Buying Kellogg's and General Mills brands, about 40% of the price covers the advertising budget to make you think its great stuff, and 35% covers a fee paid to the store for a great position on the shelves. Take off 75%, and an off-brand label of the same cereals can be profitably sold for under $1.50 a box (used to be under $1.00).

Anonymous said...


I am a grocery industry insider - for 30 years.

The grocery wholesale industry runs on a "cost-plus" basis. The bigger the order, the lower the "plus" (a percentage of the "cost") charge on the invoice, which means that the amount the big retailer pays for each unit is much less than the small retailer.

Big box stores, with their own warehouses that allow them to place truckload orders from wholesalers - or better yet, order directly from brokers or producers and surpass the wholesale level altogether, therefore get a price break that independent grocers do not.

Independents are not fleecing their customers. Think about it, if they could afford to sell that pasta sauce for $2.04, sheer competitive pressures indicate that they would. (The exception being the groceries that sell an "upscale" experience and are located in upscale neighborhoods. Contrary to your response to Derrick, many upscale people do indeed take pride in shopping upscale, "exclusive" stores that charge more for exactly the same products. In our area, Lunds/Byerlys routinely charges 10-15% more for identical products as stores that present themselves as budget grocers, yet they are not in any danger of closing.)

I've been doing price comparisons for 30 years, and can testify that: 1) our natural food, organic co-op routinely comes in lower than EVERY OTHER store in the area on identical or same-quality products (this includes Trader Joe's); and 2) the bottom line total at conventional grocers is usually within $2 for the identical shopping trip, no matter how the prices are divided among the products.

The big box stores have changed the landscape of grocery, and within a few years I fear that many independents and chain grocers - yes, even those with big stores- will close. Over the past decades, food workers' unions have been run into the ground. Very few union contracts now offer the level of pay and benefits that we do to new employees. Once "TarMart" has you at their mercy, they can charge whatever they want to. They added groceries to capture more visits, so that, as someone mentioned above, you won't just shop your grocery list, you'll find all sorts of other, higher margin items that you did not plan on buying when you walked in.

You want low prices, so somebody else is paying. That is always the case with food. Someone, somewhere, is paying.

The demand for low food prices contributes to the death spiral of wages. Was a time a man could work in a produce department and support a family. Now it is only the department manager - if lucky.

Americans pay between 10-15% of income, on average, for food. The rest of the world pays up to 50%, which was close to pre-WW2 American experience as well (35-45%).

I guess you could say it is a good thing that major companies are driving food prices down, since they are also part of driving down our wages and domestic industries. Did you know that WalMart's buying practices have forced producers to leave this country?

End stage capitalism: one guy owns everything and the rest of us fight over scraps.


Anonymous said...

My last comment was swallowed by the spam catcher, I think. Too long?

Red Cardigan said...

Found it, Elizabeth. Thanks for letting me know--I don't always check the spam folder.

The comments you make are interesting--but, again, I don't know what the consumer can do about it. I can tell you right now that it costs our family too much to try to do all our shopping at local grocery stores (which are not independent anyway--they are chains). And one local store is always selling goods past the expiration date, while the other carries very little in terms of produce or necessities.

Do other nations pay what we do for things like transportation--or is that even an equation in places where the choice to walk or drive is a feasible one? If food costs rise too much in a nation where people must drive and pay for gasoline and pay more out of pocket for other goods and services, we're still going to end up in deep trouble.

Further, as some people have pointed out on various websites about this issue, the "average" of around 10%, give or take, of American income spent on food was per person, not per family. This makes me wonder if the number of two-income families in America throw off the averages when compared to the dearth of two-income families in the developing world (where percent of income spent on food is much higher). It's interesting to read the debates about that statistic.

In any case, a quick calculation based on my usual grocery bills and our family's net income shows that our family's grocery expenses account for around 20-25% of our income. This may be because we eat out far less frequently than most Americans--another number which may throw the "grocery expenditure" figures off, if the amount of money Americans spend eating out (and thus not buying groceries) isn't considered.

So if I'm already spending at least 22.5% of our family's income on food annually, I can't afford to shrug if the price of groceries goes up by 10% or so--that's going to have a real impact. And I'm sure that's even more true for people with larger families and less income.

You've intrigued me; I'm going to do a post up top asking people to calculate the percent of their family incomes that go to grocery expenses.

Bathilda said...

One thing making our food expenditures less than in other countries is government subsidies. If meat cost what it "should", meaning without government assistance of any kind to the industry, people would pay a LOT more for it. Ditto corn, and corn is in EVERYTHING. Maybe that's why food costs are relatively more in other countries.

Elizabeth, I'm glad to hear from someone on the inside. I do a lot of shopping at Trader Joes because it's a lot cheaper than at my regular grocery. Same stuff, different label. Plus, most is organic and/or really tasty. I do realize that grocery stores are on really tight margins, But if they weren't making money, they wouldn't be in business

Anonymous said...


Corn prices are a huge price driver. We heard just last week from a number of our meat vendors that their feed corn prices just jumped $2/bushel.

Corn is mostly being used for fuel, and the prices farmers can get for it are causing farmers to replace wheat, soy and even cotton with corn. We are going to see all sorts of prices climb this year.

We do not have anything like a free market in the ag business. Even free-market fans in the Republican party steer clear of fixing the ag-subsidies, especially if they are from heavy ag states. To a great extent, consumer food prices reflect the free choice of farmers to plant corn for ethanol rather than to plant food crops.

The food percentage question is a good one and I look forward to seeing more comments on the new post.

One of the issues we have is that the increased interest in local foods is changing the landscape in unpredictable ways. Big Food producers are, frankly, scared, and they are attacking it by promoting so-called "size neutral" government regulations. They know that only big companies will be able to afford the "size neutral" regs. It is very cynical of them indeed, when most of the need for these regulations is due to massive food recalls due to contamination at said large food producers.