Is Consumer Spending Affected by Housing?

Traditional demographic reports and even complex modeling systems DO NOT incorporate the performance of the local housing market into their services. Have you or your clients ever had a location that by all accounts appeared to be optimal but in reality it had to be closed down due to lack of performance?

Have you recently had a location under perform versus a year ago and you don’t know why?

 

Here is an example of a location that appears to be perfect for an upscale clothing boutique based upon demographics alone:

 

Residential Population

 

1 Mile Radius – 28,274

 

3 Mile Radius – 139,713

 

Daytime Employment

 

1 Mile Radius – 17,855

 

3 Mile Radius – 64,591

 

Average Household Income

 

1 Mile Radius – $120,789

 

3 Mile Radius – $91,128

 

Residents with White Collar Jobs

 

1 Mile Radius – 11,733

 

3 Mile Radius – 48,720

 

Residents with Blue Collar Jobs

 

1 Mile Radius – 2,601

 

3 Mile Radius – 16,231

 

If you just looked at these numbers you would summarize that the area has a very dense population, very high income and a very high number of people with white collar jobs. All good things if you are a retailer selling items with a higher price point.

 

BUT…

 

Are the consumers willing to spend money at your retail location?

 

Imagine your own neighborhood and the local geographies your friends live in. What you experience and what you see and hear about those around you impacts how you think of the future and influence your retail spending decisions today.

 

Perhaps, many of the homes in your neighborhood are “underwater,” and those that are selling are often sold at a loss. There are noticeably more “For Sale” signs standing in yards waiting for a viable offer. You now see vacant homes­ in your neighborhood, and maybe more in the neighborhoods around you. Compared to last year, maybe more of your neighbors have either lost their job or have had their wages and hours cut. Your closest friend, like you, is bringing more work home on her computer at night, but not getting paid more. She calls it “job insurance.” She’s worried because hardworking capable friends can’t find work, and they are looking. You hear numerous similar anecdotal stories at local school sports events, cocktail parties, church and other places.

 

Wouldn’t an environment like that affect your willingness to part with your cash? Would this type of environment cause you to “splurge” less and save more when possible? Would it cause you to grace the doors of discount/value stores with a new mentality and check menu prices more closely when eating out? If you haven’t experienced this, good for you, but your customers might be going through it right now.

 

Introducing the Willingness to Spend Score from Catalyst Analytics

 

Willingness to Spend Score: quantifies your area’s qualitative household attitude toward spending disposable income on a scale of 0 to 100. The lower the score the more cautious the local households attitude to parting with their money. A score of zero (0) would equate to “survival desperation- hoarding all cash possible,” whereas, a score of 100 would equate to “will splurge to reward hard work or goal achievement.”

 

This score incorporates the changes occurring to the local housing market surrounding your retail locations. Included are changes to sales volume, home values (price per square foot), mortgage risk exposure (what percent of mortgages are underwater), changes to employment rates (are people losing jobs?) and changes to the number of households in the area (are people moving out or in?). Combined, this information is incorporated into our proprietary algorithm with then provides results as to the overall Willingness to Spend Score for your area on a scale of 0-100.

 

Practical meanings for score ranges:

 

• 80-100 – High % disposable discretionary income, especially for areas where the Stability Strength Score is greater than 70. Will splurge to reward hard work or goal achievement. Will pay for exceptional service, product quality, personal time savings, and unique opportunities for quality of life experiences. Very high demand for housing, increasing home values and low mortgage risk for households in this area.
• 60-80 – Economic survival is assumed, especially for new households moving into the area. There is an overall increase in demand and value for homes in this market area. Current stage of life (Baby Boomer, Echo Boomer, Gen X, etc…) sets priorities for incremental spending, as well as saving and investment. Large purchases are strategic, well researched, with specific value priorities that may pay a higher price for quality.
• 40-60 –There is a “do without” mentality apart from necessities and extremely positive reaction to value/quantity propositions. Will splurge for exceptional deals. Rainy day savings mentality. “Good enough” takes priority over quality with rare exception of price steals for quality goods. If this score moves closer to 60 over the next few months it is an indication that the local housing and job markets are taking a turn for the better.
• 20-40 – Economic survival is priority here as this area is continuing to deal with decreasing home values, underwater mortgages and/or job loss. Value shopping that focuses on necessities is the priority, especially for households with children present. Echo boomers and singles are the groups most prone to household consolidation. There is a tendency to hoard money and “go without.” Consumers will be sensitive to minor price increases as incomes are constrained.
• 0-20 – Bare necessities met with government or private sector subsidies are prevalent in areas where the Stability Strength score is below 50. For areas with a higher Stability Strength Score (greater than 60) any disposable income is being hoarded while home values plummet and job loss continues to increase in the surrounding neighborhoods. Food coupons, unemployment subsidies, and other social safety nets are critical for survival for many households, as is high household consolidation and high household size.

 

Do your retail locations appear to better than they actually are?

 

By all accounts the location described above should be an ideal location for almost any retailer, especially a high end one, but due to the impact of the local housing market the consumers in the area are more prone to value shopping and are most likely hoarding extra cash while waiting to see how this housing fiasco shakes out.

 

Want to see for yourself? View our demonstration that was made specifically for the retail market. 3L Score for Retail