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In weak economy, Americans swap steak for chicken
March 12, 2008 / 4:38 PM / 10 years ago

In weak economy, Americans swap steak for chicken

WASHINGTON (Reuters) - At U.S. warehouse club stores, a growing number of shoppers are giving up steak for cheaper chicken. Coffee sales are soaring at McDonald‘s, while higher-priced Starbucks slows. Restaurants are serving fewer customers because more people are eating at home.

<p>A barista makes espresso during training at Starbucks in New York, February 26, 2008. REUTERS/Keith Bedford/Handout</p>

Stung by the housing slump, tightening credit terms, and rising inflation, U.S. households are finding ways to cut back, putting a damper on the consumer spending that is the driving force behind the economy.

Retail sector analysts call it “trading down” when consumers seek out cheaper alternatives, and it is increasingly evident across chain stores and restaurants. Even gasoline consumption has slowed in recent weeks.

“With the burdens of the housing downturn broadening under the weight of tightening financial conditions, coupled with surging energy costs, ‘trading down’ and ‘trading in’ behavior should spread, especially as the labor market weakens,” said Deborah Weinswig, retail analyst at Citigroup in New York.

Weinswig noted that in 2007, consumers devoted a bigger portion of their food spending to eating at home rather than dining out. It was the first such increase since 2001 -- the year of the last U.S. recession -- and the biggest year-over-year jump since the 1940s.

On Thursday, economists will be poring over February retail sales data from the Commerce Department. Sales are expected to rise a modest 0.2 percent, although much of that increase may reflect rising energy prices rather than healthy demand. In January, when sales rose a stronger-than-expected 0.3 percent, gasoline stations posted the biggest increase.

SpendingPulse, the retail data service of MasterCard Advisors, said retail sales excluding autos fell 1.1 percent in February, the biggest decline since the data series began in 2003 and one which bodes ill for Thursday’s government report.

The retailers themselves reported February sales growth that exceeded analysts’ expectations, but that was largely because of surprisingly strong growth at Wal-Mart Stores Inc, a discount chain that has seen business pick up as consumers look for ways to save money.

Wal-Mart’s sales at stores open at least a year -- a closely watched measure known as same-store sales -- rose five times as fast as its biggest rival, Target Corp. Target is also a discount retailer, but carries some pricier clothing and housewares as well. Demand for those has been sluggish.

When the economy was booming earlier this decade, Target’s sales growth routinely outstripped Wal-Mart‘s.


While much of the world’s attention has been focused on banks’ balance sheets that have been constrained by bad mortgage-related debts, household balance sheets are also suffering. The U.S. savings rate stood at a negative 0.1 percent in January, indicating that consumers were spending more than they earned.

With credit harder to come by, economists widely expect the savings rate to pick up from these unusually low levels. That means slower consumer spending.

Retailers that sell nonessential “discretionary” goods have been particularly hard hit. A handful of specialty retailers have filed for bankruptcy so far this year, including gadgets chain Sharper Image and catalog company Lillian Vernon. Personal bankruptcies are also on the rise, up 15 percent in February from a month earlier.

Adding to the strain, rising prices for food, fuel and a host of related items are taking a bigger bite out of household budgets, taking more money away from discretionary purchases.

U.S. retail prices for regular gasoline hit a record $3.23 a gallon this week, and the Energy Information Administration expects them to peak at $3.48 in May.

Soaring commodities have also pushed up the cost of food. Chicken company Pilgrim’s Pride Corp said on Wednesday that based on current commodity prices, it would cost $1.3 billion more to feed its flocks this fiscal year than it did two years ago. That means higher chicken prices.

The company has said restaurant and food-service customers were fighting hard against those price increases, well aware that their cash-strapped consumers were reluctant to pay more.

The one wild card is the $152 billion 2008 fiscal stimulus package. Checks are expected to begin arriving in May, and Goldman Sachs analysts estimate that will put $100 billion of cash in consumers’ pockets, representing 2 percent of annual retail sales.

This time around, tighter credit conditions and growing worries about recession may “constrain the propensity to spend these dollars,” Goldman analysts cautioned in a research note.

However, if consumers spend just half of the money over a six-month period, it would add 2 percent to retail sales in the third and fourth quarters “while still leaving some over for consumers to shore up balance sheets.”

Editing by Andrea Ricci

Our Standards:The Thomson Reuters Trust Principles.
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