In 2008, U.S. consumers experienced a stunning string of economic shocks to the system. Gasoline and food prices shot up as housing prices plummeted. Stock market declines accelerated into crashes as unemployment rose at alarming levels. As $50 trillion of national wealth evaporated, the country and the world slid into the worst economic downturn in generations. Amid these calamities, it's hardly surprising that consumers are changing their behaviors to adapt -- cutting back on spending while trying to increase household savings. In his report, "Pricing in an Economic Crisis," Mark Laceky, vice president, North American pricing practice, The Nielsen Company, takes a look at navigating this uncharted territory.

Shifting Priorities
Consumer shopping behavior is undergoing a tectonic shift. Consumers are crippled with fear of the new economic reality and they know that fundamental changes are necessary in order to shepherd their families through a new tumultuous landscape.

Tighter budgets are driving a fundamental resetting of household priorities -- feeding the family is first and foremost while luxuries are expendable. And everything in between is being re-evaluated. Eating out at restaurants is down, and home cooking is up. Purchases across all categories are being re-examined with an eye toward necessity and basic value.

Do Tighter Budgets = Greater Price Sensitivities?
The overall shift in households' perception of value is a form of increased price sensitivity -- consumers have less to spend, so price and value are more important than ever. But at what level?

Consumers are now reallocating their purchases across categories based on a new value paradigm. Value is the key factor at a macro-level across categories. But how does this affect pricing within categories -- are consumers more price-sensitive in a recession to item-level price changes? To answer this, Nielsen modeled over 300 brands/sizes (both manufacturer and retailer brands) across 50 top categories. Price sensitivity was measured for full year 2007, and for the first and second halves of 2008.

Surprising Stability
Nielsen found that while some items became more sensitive during the recession and some less, the average price elasticity of the 300 items increased only slightly over time (from -1.33 to -1.35 to -1.37). Indicating that, within categories, consumers are behaving in much the same way as they have been. While consumer sensitivity to "value" is indeed changing, changes are at a higher level than a reaction to changes in individual items' prices.

With that said, however, some categories were found to have become more price-sensitive and some less. Items that have high-price-sensitive characteristics include those with frequent purchase cycles, and include categories such as beverages, comfort foods/drinks and shelf-stable items. Lower price-sensitive characteristics include items that have high unit prices of greater than $5, have longer purchase cycles, and include frozen/refrigerated and fresh categories.

And consider this: retailer brands are 30 percent less price-sensitive to price changes than manufacturer brands. That may seem counterintuitive since consumers typically buy retailer brands because they are lower-priced, making them more price-sensitive. In reality, however, consumers who buy retailer brands have already made their price decision and don't need to put as much thought into pricing decisions after that. They are actually less sensitive to changes in item prices.

Commodity Price Bubble Bursts
After an unprecedented run-up in commodity prices in late 2007 and the first half of 2008, many manufacturers were forced to increase prices -- some dramatically and more than once. Categories such as rice, cooking oil, tuna, pasta, mayonnaise, margarine, eggs and peanut butter were some of the hardest hit.

Stay tuned for more of this report in the next edition of Dispatch.