Second Quarter, 2007

Manufacturing/Durable Goods & E-Business

Customer Satisfaction Flattens

Google, Toyota and Apple Stumble; Detroit Edges Closer to Imports

Improvement in the American Customer Satisfaction Index (ACSI) slows with a marginal increase of 0.1% to an overall score of 75.3 in the second quarter of 2007. Across all companies gainers outnumber decliners 57% to 36% with 7% unchanged.

Customer satisfaction with the products and services sold in the US has risen for nine consecutive quarters - the longest period since measurement began in 1994. Yet the rate of growth is declining.  As the improvement in customer satisfaction began to level off at the beginning of the year, so too has consumer spending. 

Even as the economy grew at 3.4% during the second quarter, consumer spending was unusually weak: a drop from 3.8% in the first quarter to just 1.3% in the second quarter.  Not only is this much lower than usual, it was also lower than predicted by overall customer satisfaction.  Over the past 15 years, consumer spending growth has averaged about 3.6% per quarter. Over this same period, ACSI growth has ranged from -1.0% to 1.6%. While changes in spending tend to vary considerably and are often difficult to predict, one consistent predictor of spending growth from quarter-to-quarter is changes in ACSI. In quarters where ACSI declined, consumer spending growth averaged about 3.4% the following quarter, below the series average, while in quarters where ACSI increased, spending growth averaged 3.9%. When ACSI did not change, spending growth was at its long-term mean of 3.6%.

When consumer spending drops, it often rebounds the next quarter.  That may well be the case here.  Much will depend on the effect of the slumping housing market.  But the jobless rate is low, corporate profits are healthy, and there has been some income and wage growth as well.  Chances are that corporate borrowing will be more affected than consumer borrowing. Thus far, there are no signs that consumer borrowing is abating. Household savings are low and fell to 0.6% in the second quarter. But it has often been lower than that in the past two years.  The ACSI forecast of consumer spending growth for the second quarter is in the range of 3.1% to 3.9%. To the extent that the effect of debt service dampens demand, spending growth could be as weak as 2.8%.  If that turns out to be the case, GDP growth would most likely be anemic.

The small increase in overall customer satisfaction is mostly due to what consumers see as slightly better "value for money," but improvements in quality are also playing a role. Customer loyalty is up slightly and complaints are down. Buyer expectations show no inflationary tendencies.  This is important because rising expectations would be more difficult to meet and the risk of weakening customer satisfaction and repeat buying would increase.   

The auto industry gains 1% to 82, whereas personal computers fall 3% to 75. In terms of reliability, cars have always outperformed PCs by a large margin - growth in usability, range of applications and number of users have not been matched by corresponding improvements in reliability and ease of use. In addition, ACSI data suggest that the importance of service customization is increasing. This may pose a challenge for durable goods manufacturers and retailers in particular. If consumers are demanding more customized services for their cars and computers, such services are often both costly and difficult to provide.

Consumer Durables

Personal Computers: Apple Stumbles; Dell's Problems Continue
Apple and Dell contribute the most to the decline in customer satisfaction for personal computers. ACSI scores for both drop by 5%, though Apple remains the industry leader with a score of 79, well ahead of the HP division of Hewlett-Packard at 76.  Dell, once the ACSI leader in the industry, drops and finds itself near the bottom of the group.

Dell's result is not surprising. A year ago, even though the company's ACSI score was up, customer service remained an issue and we noted that the company would need to take significant steps to reverse this trend.  However, it appears that any fixes the company may have attempted were short lived. Dell now resides among the lower echelon of measured PC makers, a solid 5 points behind Apple, and only 1 point above the Compaq division of Hewlett-Packard.  

With more than $21 billion in revenue, Apple has grown by nearly 400% in sales during the past 5 years.  Recent demand for Mac computers is up by about 25%, which is more than twice the rate of growth for the overall PC market.  Many analysts seem to believe that Apple is gaining market share in part because of iPod users switching to Mac computers.  It is very difficult to ensure that both customer service and satisfaction stay high when a company suddenly needs to service many more customers.  This is probably what is behind the decline in customer satisfaction for Apple.  According to the Economist (6/9/07), there are also "grumblings about manufacturing defects and customer service."

Autos: Detroit Improves, Toyota Falls - What's Going On?
Customer satisfaction with automobiles improves again this quarter, up 1.2% to a new high of 82.  Greater satisfaction with domestic and European brands is driving the continued upswing.  Asian automakers peaked a year ago and have fallen back a bit.  The good news for the US automakers is that they are moving closer to the Asian manufacturers.  The bad news is that they still rank last.  But the trajectory is promising: as was the case in 2006,+ the gains come more through quality improvements than they do from price incentives, which was a departure from earlier periods. 

Typical of past years, luxury and Asian nameplates dominate the top of the automobile category.  The Lexus division of Toyota leads the industry, up 1% to 87, followed closely by Buick, BMW, Cadillac and Ford Lincoln-Mercury, all at 86.  Next are Toyota and Honda at 84 and Hyundai at 83, tied with Mercedes-Benz to round out the list of nameplates that are performing above the industry average.  However, all is not well with the Japanese and Korean automakers which saw the largest single-year drop in satisfaction since 1996.  Nissan (down 2% to 80), Mazda (down 1% to 78) and Kia (up 1% to 78) are all below the industry average and among all Asian nameplates, only Kia improves from a year ago.

Most noteworthy is the drop of Toyota, down 4% to 84.  Similar to Apple, Toyota is faced with the challenge of managing growth and quality at the same time.  The number of recalls has increased and there are issues with dealership service.  In response, Toyota has launched a major new initiative: EM Squared - Everything Matters Exponentially, which is designed to address the slipping customer satisfaction. While it may be an effective tool for rallying employees around a central theme, the fact is that everything does not matter exponentially.  In order to increase customer satisfaction, it is important to identify those aspects that have the greatest marginal impact on the customer.  The company that tries to improve everything will have a difficult task and will not be able to allocate resources in a very effective manner.

While Toyota is dealing with problems of growth, Ford faces the opposite problem. It has shrunk operations, consolidated production and cut back on its workforce in recognition of its shrinking market share.  Smaller production runs may allow for a better focus on quality and a smaller customer base means the most satisfied (and therefore most loyal) customers are those that are most likely to remain.  Last year, CEO Bill Ford announced that Ford would begin making cars to satisfy the customer rather than just to fill a factory. It looks like Ford is taking steps in that direction.   Although sales are down almost 10% from a year ago, both the Lincoln-Mercury and Ford divisions improve customer satisfaction by 4% to 86 and 80 respectively.  The Ford division has a ways to go to equal the industry average, but the division's 7% improvement over the past two years is the largest in the industry.    

E-Business

Portals and Search Engines: Comeback by Yahoo; Google Slips

For each of the major industries this quarter, one of the customer satisfaction leaders stumbles: Apple among PCs, Toyota among automobiles and Google in e-business.  Google falls by 4% from a year ago to a score of 78.  Its year-to-date stock returns have been about market average - a far cry from the explosive growth after going public in 2004.  Google also missed its most recent earnings forecast. For a company that has introduced so many new products and made so many changes, it may be surprising that its homepage has changed so little.  It is almost the same as it was in the 1990s.  Some users say it looks stale compared to Ask.com, which has a very different display of search results.  Visual presentation may well be a factor behind the falling Google scores, as some users compare the look of Google to Ask.com.  Ask.com's ACSI score increased more than any other search engine.  It is up by 6% to a score of 75, still well behind Google.

Yahoo! has also improved.  It has always had more users than Google and now it leads in customer satisfaction as well. Yahoo! has been there before.  As its customer satisfaction rose to a high of 80 in 2005, Yahoo! did well financially.  With falling customer satisfaction in 2006, Yahoo! also saw stock price and profits falling sharply.  The company has also suffered from recent well-publicized management and business strategy issues.  But this year's improvement in ACSI restores almost all of the 2006 loss in customer satisfaction.  Yahoo! has more unique visitors than any other website.  Many design changes and enhancements have been made, all with the goal of improving user experience, yet these kinds of improvements take time for a large base of users to learn and adapt.  The initial risk in redesigning major pieces of the Yahoo! user experience appears now to be paying off in higher customer satisfaction which will be critical to turning around this year's lackluster financials.   Yahoo! still lags Google in terms of revenue-per-search and has a long way to go, but it seems that the new Panama product, which attempts to match search ads with user preferences, may be a step in the right direction.      

AOL suffers the largest plunge in customer satisfaction this quarter, down 10% to the lowest score in the industry (67).  Once a subscriber-based Internet access service as well as a portal, AOL now offers many of its services without charge, including software and email accounts, services that used to be exclusive to subscribers.  The transition has not always gone smoothly, particularly for paying customers who want to migrate to the free services, prompting complaints and some bad press suggesting that AOL's customer service has been making it too difficult for customers to cancel their subscriptions.