Companies move to cheap chic as baby boomers curb spending

Most analysts expected that, as baby boomers approached retirement, they would spend less and save more. However, no one could have predicted how quickly this would occur. Thanks to the economic downturn, the Woodstock generation has put the brakes on expenditures and companies are trying to react quickly enough to stay in business.

Some think it's a short-term temporary shift in buying habits for baby boomers. Most, however, seem to argue that it's a permanent long-term change that came on earlier then expected as losses in home equity and retirement portfolios forced major spending changes. As they near the end of their working lives, many boomers suddenly must adapt to tighter budgets and reduced expectations. Previously, this generation reached their spending peak at 54, as opposed to previous generations that peaked at 47; these extra seven years translated into huge revenues for companies that marketed to boomers.
Consulting firm McKinsey believes that this conversion to thrift could stifle the economy's hoped-for rebound. Companies have cultivated and counted on baby boomers for 30 years; many, in fact didn't even court Generations X and Y because the 1947-1960 cadre proved such easy pickings. In the emerging economy, however, this once-reliable demographic has become a weak foundation upon which to build a business, and many retailers are trying to appeal to Generations X and Y, as well as to thriftier baby boomers.

An excellent example of this is clothing designer Vera Wang, who is releasing a new casual line called Lavender that will be aimed at women in their twenties and thirties. Similarly, while Mercedes continues to target baby boomers, it's starting to recruit members of Generations X and Y to create more youth-oriented designs.

Another big move is the shift to cheap chic, or ways to pamper baby boomers on a budget. This strategy also attracts younger shoppers. Target is probably the best-known cheap chic brand, but others are quickly jumping on the bandwagon. Nordstrom (JWN), for example, is building fewer full-price department stores and increasing the number of lower-priced Nordstrom Rack stores, which sell its usual brand names at discounts of 30 to 70 percent.

Similarly, Starwood Hotels (HOT) recently introduced two scaled down versions, the Aloft and the Element, for the cheap chic crowd. These new models, which help bring the room price down to the $150 to $170 range, don't have full-service restaurants, room service and valets. The chain has opened 25 Aloft hotels so far, and is opening two new hotels each month.

In terms of food, OSI Restaurant Partners, which runs Outback Steakhouse, downsized its portions to offer less expensive menu items. People are still spending about $19 per person, though, because they are ordering alcoholic drinks and desserts. At their Fleming's Prime Steakhouse restaurants, OSI has had to lower prices and now diners spend $36 per person, rather than $60 that they could expect in the past.

The key question that no one can answer for certain is whether or not these spending changes will be permanent. Regardless, these moves are not new to marketing. For example, after the 1929 crash, General Motors needed to come up with a budget model for those who preferred Cadillacs. That's when it introduced the 1934 LaSalle to satisfy the needs for cheap chic. Once the economy finally recovered, Cadillacs regained their customer base.

Many fear that, as baby boomers cut back, the U.S. will never return to its growth rates of 3.2 percent per year. Consulting firm McKinsey believes the baby boomers' conversion to thrift could be permanent and could shift the U.S. to a growth trend of just 2.4 percent annual growth. If true, this could mean that many jobs will be lost forever as the U.S. looks at a permanent downsizing.

Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies.
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