Third Quarter 1999

Manufacturing Nondurables

Customer Satisfaction for Nondurable Goods

The good news is that all industries in the nondurables manufacturing sector, with the exception of beer and personal care & cleaning products, are either up or unchanged. The bad news is that the increases are small and that the levels of customer satisfaction are still slightly below those of 1994 and 1995.

Relative to other sectors of the economy, the ACSI scores for nondurables remain high. This is as expected for a very simple reason: People tend to buy what they like, and if they don't like what they have bought, they will avoid buying it again. This process is easier and less costly for nondurables compared with other products and services. The ability for buyers to act this way is also of fundamental importance to a market economy. It means that at any given point in time, only a small fraction of buyers should be dissatisfied. The degree to which this is the case - high overall customer satisfaction scores -- is a measure of the market's ability match customer desires with a commensurate variety in the supply of goods at affordable prices.

With a minor exception of apparel, where the time span of consumption is longer, declining customer satisfaction for a nondurables company is not necessarily associated with delivery mishaps or quality issues, but with a reduction in buyer choice options (e.g. fewer brands, package sizes, flavors, etc) in the marketplace. Conversely, an increase in customer satisfaction is often the result of increased competition and better choice alternatives.

The ACSI results for food and clothing come at a time of low inflation and when consumer spending for these products increased as well. Low inflation typically does little to increase customer satisfaction, although rising prices may well have an adverse effect. As long as inflation is under control and efficiencies in manufacturing and distribution are not obtained by excessive streamlining of product lines, one would expect satisfaction with consumer nondurables to increase or remain high.

Customer Satisfaction and Expectations

Failure to increase customer satisfaction is often blamed on rising customer expectations. As shown below, however, customer expectations are only slightly higher now compared with 1994. It is true that the gap between expectations and experienced (perceived) quality is larger today, but it is quality (service quality more than product quality) that has gone down - expectations have increased by less than 1%.

A large gap between expectations and quality is unlikely to persist in the long run. Buyers learn from their experiences and adjust expectations accordingly. However, in a high growth economy that brings about many new products, features, and services that have yet to be experienced by the users, the gap tends to be larger.

ACSI and Financial Results

The statistical relationship between ACSI and financial performance continues to be strong. This is sign of a well functioning market economy. If firms were not rewarded financially for satisfying their customers, the structure of the economy, or parts thereof, need to be examined. By the same token, if companies that cause dissatisfaction among their customers were not punished by consumer and investor rejection, one would have to question the structure of the market.

Among the third quarter ACSI companies, Hershey Foods has consistently performed well on the ACSI. It has always been one of the highest ACSI scoring firms and its stock has also consistently outperformed the S&P 500. This is in contrast to Dole Food, which started off in 1994 as the highest scoring ACSI firm, only to tumble by more than 11% since then. This is a decline surpassed only by airlines. The ACSI decline started in the third quarter of 1996. In the fourth quarter of the same year, the stock price no longer kept pace with the S&P 500 and by mid 1998 started a drop that now has cut Dole's stock price in half.

Coca Cola is another high performing ACSI company. It has, until recently, outperformed the S&P 500. The same is true with ACSI: Coke's scores have generally been high and led the industry in the mid 1990's. The ACSI score for 1999 is up by 2.4% and, recently, the stock price seems to be on an upward trend as well.

Using data from all the publicly traded firms in the ACSI, the statistics suggest that customer satisfaction has had a growing impact on market capitalization. This is consistent with the growing equity values assigned by the stock markets to intangible assets and with the argument that the value of customer assets, minus unassigned costs and taxes, is equal to the sum of a firm's total economic assets. One point difference in ACSI, for the average publicly traded company in the ACSI, is now estimated to be associated with a difference in the market value of equity of $898 million. ACSI company valuation was applied to United Parcel Service before it its public stock offering. As of October 10, a model based on ACSI data estimated UPS stock price to $72-$78. A month later, UPS's IPO, the largest in history, was priced at $50 and quickly gained to close at $74 on its second day of trading. Company valuation based on customer asset measurement will probably receive more attention in the future. It is relatively inexpensive, produces estimates in a timely manner, and appears to be quite accurate.