ACSI Commentary February 2013
February 26, 2013
Quarterly Update on U.S. Overall Customer Satisfaction and
Commentary on Department & Discount Stores, Gasoline Stations, Health & Personal Care Stores, Internet Brokerage, Internet Retail, Internet Travel, Specialty Retail Stores, and Supermarkets
By Professor Claes Fornell
The Donald C. Cook Professor of Business Administration
Stephen M. Ross School of Business, University of Michigan
Customer Satisfaction Upswing Marks Year’s End, Boosted by Government and Retail Gains
The national customer satisfaction benchmark improves in the fourth quarter of 2012, rising 0.5% to an ACSI score of 76.3 on a scale of 0 to 100. While most of the gain is due to improvements in the public sector—with marked increases in citizen evaluations of both federal and local government services, according to the American Customer Satisfaction Index’s 2012 government report—the national index also is helped by higher customer satisfaction in the Retail and E-Commerce sector.
Sales growth in the United States was fairly strong in January 2013. Low inflation and shrinking household debt, along with long-depressed demand, are now fueling a surge in consumer spending. In the third quarter of 2012, the ACSI forecast for overall consumer spending growth was 2.8%, slightly higher than the actual 2.2% increase. At present, consumer confidence is still shaky and employment, albeit continually improving, is still too weak to boost demand. Add in low wage growth and high gasoline prices, and the outlook for an increase in consumer spending is uncertain. Nevertheless, the increase in the national ACSI benchmark for the fourth quarter of 2012 does point to a continued spending growth of about 2.7%.
Customer satisfaction with supermarkets improves by 1.3% to an ACSI score of 77. Following a 6.0% spike in food prices in 2011, the cost of food prepared at home rose only 1.3% in 2012, slightly less than the overall increase in the Consumer Price Index. Grocery chains continue to offset rising prices with improved quality of service, expanded merchandise selections, and better store layouts. Judging from the increase in customer satisfaction, they have been quite successful.
Among supermarket chains, Publix reigns when it comes to customer satisfaction, just as it has done in every year since the American Customer Satisfaction Index’s inception in 1994. In 2012, Publix gains 2% to a score of 86, thereby widening the gap to Whole Foods, which has leveled off at 80 following four straight years of gains. Several other chains cluster closely behind Whole Foods. Kroger is unchanged at 79, followed by Winn-Dixie, up 4% to 78 to tie the aggregate of all smaller chains, which slips 1%.
The drop-off to the rest of the supermarket industry suggests that even in a strapped economy, focusing primarily on discounting is not sufficient to create high levels of customer satisfaction. Supervalu gains 3% to 76 as the company tries to reduce costs in order to be competitive after years of lackluster sales. Low prices can create short-term gains in customer satisfaction as consumers look for the best deals, but for the strategy to work over the long term, any business that tries it should make certain that it has the cost advantages to pull it off. If not, and it is not clear that Supervalu has such advantages, either profit margins will be squeezed or prices need to be raised. Safeway is unchanged at 75, while discount giant Wal-Mart is in last place despite a 4% gain to an ACSI score of 72.
Specialty Retail Stores
Customer satisfaction with retailers that specialize in home improvement, electronics, office supplies, and books dips by 1.3% to an ACSI score of 78. Membership wholesale warehouse clubs and office supply chains dominate the top of the category, while clothing retailers are at the bottom.
Office Depot leads all specialty retailers, gaining 6% to 84. Office Depot is transitioning from large, warehouse-type outlets to smaller, more intimate stores with better customer service. So far, the strategy seems to be paying off. The customer satisfaction improvement puts Office Depot well ahead of Staples (79) and OfficeMax (78), both of which are unchanged. While Office Depot’s margins and stock value have improved in the wake of the transition, sales have yet to follow suit. With a merger now underway for Office Depot and the much lower-scoring OfficeMax, it may be difficult for Office Depot to maintain high satisfaction. ACSI data show that customer satisfaction often declines following mergers, as companies struggle to combine operations and customer service suffers.
Second to Office Depot, Barnes & Noble makes the biggest improvement, up 4% to an ACSI score of 82. Although customers enjoy shopping in bookstores more now, it is largely because there are fewer people visiting them—Barnes & Noble has closed stores due to weakened in-store sales. Sandwiched around Barnes & Noble are the two warehouse clubs: Costco at 83 (unchanged) and Wal-Mart’s Sam’s Club at 80 (-1%).
Home improvement retailers battle over the next few spots, with Lowe’s (unchanged at 79) edging out Home Depot (down 1% to 77). Electronics chain Best Buy falls in between the two after a 1% improvement to 78. Clothing retailers TJX (-3%) and Gap (-1%) are at the bottom of the category at 76. Higher prices for raw materials, particularly cotton, have dampened customer satisfaction as both manufacturers and retailers pass on the additional costs to consumers.
Department & Discount Stores
Customer satisfaction with department and discount stores rises slightly, increasing 1.3% to 77. The juxtaposition of higher-priced department stores that offer better service and higher-quality merchandise with discount chains that offer lower prices creates a mixed picture of highs and lows across the industry. Department store Nordstrom leads the way, unchanged at an ACSI score of 84, while discounter Wal-Mart is last, inching up 1% to 71. While quality trumps price with respect to customer satisfaction, pricing pressure remains a challenge for all retailers amid sluggish consumer spending. Even the high-end department stores have resorted to more price promotions to boost sales, particularly during the holiday shopping season.
A trio of retailers is tied at 81, well below Nordstrom, but still above the category average. Target gains 1%, Kohl’s is unchanged, and J.C. Penney slips 1%. In the next tier, Dillard’s drops 1% to 79, followed closely by Macy’s (+1%) and Dollar General (unchanged) at 78. The aggregate of smaller department and discount store chains gains 1% to form a three-way tie at 78.
Well below the field are Sears, down 1% to 75, and Wal-Mart at 71. Sears continues to struggle following its acquisition by Kmart, while Wal-Mart continues to offer the same mixture of lower quality and lower prices that has kept sales strong and customer satisfaction weak for several years. A big part of Wal-Mart’s challenge is that the chain is no longer the only game in town when it comes to discounting. Twenty years ago, Wal-Mart was able to beat the industry average for customer satisfaction, not because quality was better, but because it had the low-price market essentially to itself. That is no longer true.
Health & Personal Care Stores
Customer satisfaction with health and personal care (drug) stores reverses a two-year slide, inching up 1.3% to an ACSI score of 77. This score matches both department and discount stores and supermarkets, and is only a point behind specialty retail. This creates a rather consistent level of customer satisfaction across the retail sector. Drug stores are the one retail category where smaller chains and individual stores tend to do better. In 2012, the aggregate of smaller drug stores declines sharply by 4% to 79, but stays ahead of the highest-scoring large chain, Rite Aid (up 3% to 77).
Just below Rite Aid are Walgreens at 76 (+1%) and CVS Caremark at 75 (+3%). For CVS, the customer satisfaction improvement marks a change from a two-year slide that put the chain at an all-time low in 2011 amid both declining sales and cost-cutting efforts. Higher customer satisfaction helps right the ship financially for CVS in 2012, with revenue up 15%.
Following a fall in customer satisfaction in 2010, online retail is back on track. The category shows a small gain for the second consecutive year, up 1.2% to an ACSI score of 82. While this score is still short of the category’s all-time high, the Internet, by and large, remains a more amiable means of shopping for a variety of merchandise compared with traditional retail. Still, there are exceptions to this rule. The very best of traditional retailers—such as Publix, Nordstrom, Office Depot, and Costco—outperform the average for Internet retail. Among the individual online retailers, Amazon retains its lead despite a 1% drop to an ACSI score of 85. The company remains the highest scoring in the ACSI among Internet, department, discount, or specialty retailers. Close behind Amazon, Newegg scores 84 after a 1% slip, while eBay gains 2% to an ACSI benchmark of 83.
The aggregate of smaller websites improves 2% to match the online retail average at 82, followed closely by Overstock, down 2% to 81. Among online retailers, only Netflix falls well below the category average, inching up 1% to 75. In 2011, customer satisfaction with Netflix plunged 14%, one of the largest-ever single-year drops in ACSI history, as a result of hefty price increases. Now, the price shock has settled and customer satisfaction remains about where it was after the price hike. The plunge in Netflix’s stock price was even steeper than what would have been warranted by the deterioration in customer satisfaction. With the stabilization in customer satisfaction, the company’s stock price has increased dramatically, but not to the level it was before 2011.
Customer satisfaction with online brokerage rebounds from a dip in 2011, rising 2.6% to an ACSI score of 78. Higher customer satisfaction with the websites of smaller brokerages like Vanguard and Scottrade (up 4% to 78) is a major factor behind the industry gain. The strong stock market also has helped. Among the larger online brokers, Fidelity leads at 78 (-1%), with Charles Schwab (-3%) and TD Ameritrade (-1%) close behind at 77.
Only E*Trade falls well short of the category average, plunging 8% from an industry high of 79 in 2011 to an industry low of 73 in 2012. E*Trade has struggled of late, going through a series of CEOs in the past few years. With the recent uncertainties over the fiscal cliff and Europe’s financial difficulties, trading volumes have been lower. This is particularly problematic for E*Trade. While other firms like Fidelity and Schwab are more diversified, E*Trade relies on trading fees and commissions for much of its revenue.
Customer satisfaction with travel websites used for booking airfares, hotels, and car rentals drops 2.6% to an ACSI score of 76—the largest decline for any retail category in 2012. A combination of rising prices for travel accommodations and less discounting from travel sites has eroded value for money somewhat, bringing down customer satisfaction. Expedia (-1%) and Orbitz (unchanged) hold the lead among the larger websites with scores of 76. The two are joined by the aggregate of smaller travel sites, down 4% to 76. Travelocity follows closely behind at 75, but also shows the largest decline (-5%). Priceline finishes again at the bottom of the category after a 3% drop to 74. Nevertheless, because of the negative effects of pricing on the entire online travel industry, Priceline’s gap to the industry leaders is actually the narrowest it has been since 2002, when this category was first included in the American Customer Satisfaction Index.