Consumers Are Under Pressure this Year

Effective business strategy and tactics depend on a proper reading of the economy and general environment. A quick glance at current conditions suggests that executives will have to apply what they learned in courses for an MBA degree program to a less than welcoming climate, particularly if they focus on sales to consumers. In the past, companies often ignored problems because they could count on consumers to go into greater debt to obtain what they wanted. Those days appear to be over. According to the American Bankers Association, consumers are focused on paying down debt, even though they face obstacles in doing so.

During the third quarter [of 2012, the most recent one for which the group has data], bank card delinquencies dropped to their lowest levels since 1994, falling 18 basis points to 2.75 percent of all accounts and well below the 15-year average of 3.89 percent. The composite ratio, which tracks delinquencies in eight closed-end installment loan categories, fell 8 basis points to 2.16 percent of all accounts in the third quarter, below the 15-year average of 2.40 percent. The ABA report defines a delinquency as a late payment that is 30 days or more overdue.

ABA chief economist James Chessen attributed the change to consumers becoming better at managing their finances. However, achieving this wasn’t without strain. Although the composite ratio fell, delinquencies in five of the eight categories of closed-end loans tracked by this number — direct auto loans, mobile home mortgages, RV loans, marine loans, and home equity loans — actually rose during the quarter, according to the organization:

“The lack of broad-based improvement remains a cause for concern,” Chessen said. “Some categories have reached historical lows leaving little room for improvement. In addition, slow job growth, continued uncertainty and falling consumer confidence could signal rising delinquencies in the year ahead.”

And the expiration of the payroll tax cut that happened as part of the fiscal cliff compromise means that most people have even less money to balance their personal books. Consumers are far from being out of the woods. As they have reduced income and focus on paying own debts, businesses can expect pressure on retail sales and the resulting chain of commerce back to manufacturers and their suppliers. These effects are likely major reasons that December retail results were uneven. Consumers put money into essentials and less into additional spending that retailers had hope would boost holiday shopping. But some retailers did better than others, as Reuters reported:

Companies like Costco, TJX and Ross “are able to thrive in whatever economic environment they happen to be operating in” by adjusting their business models, inventory levels and sales strategies better than many peers, said Craig Johnson, president of Customer Growth Partners.

Companies in the b-to-c space would do well to study the shifts that top retailers make to better understand how they can adjust their own businesses to better manage challenges that are developing this year.