Preparing for the Next Energy Crunch

The prolonged US energy crunch may have abated recently, but marketers should begin preparing their responses for the next surge in fuel prices, according to a Yankelovich MONITOR Research Brief on 2005/2006 fuel prices released yesterday.

Marketing consultancy Yankelovich, which has tracked consumer value and lifestyle trends for more than 30 years, found that the surge in gas prices past the $3.00 mark was jarring enough to cause many consumers to adjust their priorities, make trade-offs and change behaviors that had become automatic before the spike. Yankelovich used its survey data on how consumers responded to the crisis to create a conceptual framework to assist marketers with future planning.

“Other gasoline price upheavals are sure to come, so smart marketers will use this intervening period to plan their responses to the next spike,” stated Lexi Hutto, Senior Consultant of MONITOR and author of the Brief. “The findings from this brief are designed to inform and enhance that planning. They offer lessons not only for the energy market, but for other lifestyle staples that really can’t be replaced or scaled back, like food and medical care.”

The Effects on the Economy

“The first thing people did was cut back on the quantity of the goods they bought,” said Hutto. “If one person cuts back, there’s no real impact. But when many people cut back in concert, that has a huge impact on the economy. We saw this trend across many product categories from restaurants to consumer packaged goods to personal services.”

According to Yankelovich, consumers also tried to save money by postponing large purchases. Many shoppers compromised on quality with strategies such as abandoning brand names for private label goods. For example, a shopper may have switched brands of paper towels. Now, many consumers won’t go back to the more expensive labels. Here are some examples of certain industries that have been affected:

• Automobile Industry – While SUV and pick-up truck sales have started to rebound, consumers are opting to buy more fuel-efficient cars as opposed to larger, fuel-inefficient models. It became much more common for consumers to pursue cars with the best MPG. “Customers are still cynical,” said Hutto. “They fear another spike, and they don’t want to feel so vulnerable next time gasoline prices surge. The payback period is still too long for most consumers to buy hybrid models, but there will be renewed pressure on automakers to develop more fuel-efficient cars, hybrids and flex-fuel vehicles in the near future.”
• Restaurant Visits – Consumers dined out less or saved extra money by avoiding finer restaurants in favor of more casual dining spots. “We saw a trend from ‘white tablecloth’ restaurants to fast casual, and from fast casual to fast food, especially among the middle and lower-middle income groups,” said Hutto.

The Evolving Value Equation

Yankelovich identified three segments of consumers based on their responses to the fuel price increases. While all three will continue to be represented no matter the market conditions, the proportion of people in each group will fluctuate under varying circumstances. The longer and more severe the crisis, the more consumers will end up in the Pragmatic Pessimists’ bucket. The three segments are:

• Pragmatic Pessimists – These consumers are willing to make significant changes to their lifestyles that would deeply alter how they live. In the recent survey, two-thirds of these consumers expected gas prices to rise above $3.29 per gallon by the end of next summer. That was about 20% higher than average prices at the time of the survey.
• Resourceful Moderates – These people are willing to make minor adjustments to their lifestyles that they would barely notice. Half of this group thought gas prices in one year would surpass $3.00 a gallon, an increase of about 8%. Fully one-quarter of this sample was uncertain and did not want to venture a guess.
• Resolute Optimists – These consumers are unwilling to make any adjustments in their lifestyles, or are only willing to make small changes or day-to-day behaviors. This group exhibited the greatest percentage of consumers – nearly 20% – who thought gas prices would decline next summer as compared to this past summer.

The spike in gasoline and energy prices caused consumers in all three groups to change the value equation that governs their purchasing decisions across the following six value equation variables:

• Quantity – Consumers buy the same brands, but in smaller quantities or less often.
• Durability – Consumers increase their emphasis on buying better quality so that products will need to be replaced less often.
• Quality – Consumers substitute preferred items or services for less desirable ones.
• Novelty and Experimentation – Consumers are unwilling to take the “risk” of buying things they haven’t tried before.
• Non-Product Value Enhancers – If they are going to pay more, consumers want to be compensated with better service or other intangibles.
• Convenience – Consumers are willing to trade off conveniences such as having someone else do the work in order to save money.

“You can basically equate consumers during the energy crunch to rubber bands,” said Hutto. “Generally, you can stretch them and they’ll snap back to their original shape. However, if they are stretched too far for too long, they might not snap back to baseline.”