Third Quarter 2009

Manufacturing/Nondurable Goods

Anxious Consumers Look to Comfort Food—Smokers Unhappy with the Price of Cigarettes

Hershey, Nestlé, Levi Strauss, Liz Claiborne, Anheuser-Busch Gain in ACSI; Philip Morris, Reynolds American, ConAgra, and Colgate-Palmolive Plunge

After a surge through the second quarter, the American Customer Satisfaction Index (ACSI) remains essentially unchanged relative to the previous quarter—receding a minute 0.1% to a score of 76.0. The Index has improved since the depths of the recession and is 1.3% better than it was a year ago.

Overall, there has been no change in customer satisfaction with food, personal care & cleaning products, and pet food. Although there are movements across individual companies, these industries have exactly the same ACSI scores compared to a year ago. Some categories have improved: apparel is up by 2.5%, soft drinks by 2.4%, athletic shoes by 1.3%, and beer by 1.2%. Customer satisfaction with cigarettes plunges by 7.7% to an all-time low of 72. Among individual firms, gainers outnumber decliners 45% to 39%.

Because of the relatively sharp increase in customer satisfaction through the second quarter, the ACSI predictive model pointed to a consumer spending increase of 3.25%, much higher than most other predictions, but not quite high enough—actual third quarter consumer spending growth turned out to be 3.35%. For the short term, it seems unlikely that households will continue spending at that level, not only because customer satisfaction is no longer rising, but also because unemployment is getting worse and so is consumer confidence. Some of the spending increase was also due to government programs, such as Cash for Clunkers, that have since expired. Unless something unforeseen happens, it is more likely that consumer spending growth for the fourth quarter will be below 3% and perhaps as low as 2%, even though retail sales may well be somewhat higher than last year.

For the long term, the question is whether the recession will cause a fundamental change in the way people spend money. Empirically, there is not much evidence in favor of a major change. Habits are, by definition, fairly resistant to change. The 1990-1991 recession, albeit less severe than the current one, suggests that consumer memory is short. It also seems to be the case that consumer spending has held up much better than expected. Paradoxically, the largest spending decline, by far, was in an industry where customer satisfaction is very strong. Automobiles have made significant strides in quality, durability, and reliability. All car manufacturers today enjoy high levels of customer satisfaction. But that also means that the cars last longer and consumers are taking advantage of it by keeping their vehicles longer.

Food: Comfort in Chocolate, but not in Frozen Dinners

Customer satisfaction with food manufacturers was unchanged with an ACSI score of 83. Heinz remains at the top of the industry with a score of 89, a spot Heinz has held for each of the past ten years. Buyer satisfaction with Heinz ketchup and the many other food products that the company manufactures ties luxury automakers Lexus and Cadillac for the highest score across all categories covered by ACSI.

Cereal maker Quaker follows closely with a score of 87, joined by two chocolate companies, Hershey and Mars. Hershey improved by 2% and Mars by 1% to 87, while Nestlé also improved (+2% to 85). The average of the three candy makers stands at 86, an all-time high. The same thing happened in 2001 in the midst of the previous recession and also in 2004 when concern over the Iraq war and rising fuel prices appeared to be reflected in higher satisfaction with comfort foods.

Among food companies, ConAgra moves sharply in the wrong direction: Customer satisfaction with ConAgra Foods matches the greatest one-year fall of any company ever for food companies. Its ACSI score drops by 7% to 78, an all-time low and well below all industry competitors, the nearest being Campbell and Tyson at 82. It is very unusual for food manufacturers to have large swings in customer satisfaction, because products usually do not change much over 12 months. However, price increases and elimination of certain offerings can certainly have a negative impact. The Banquet frozen dinner product line, which has traditionally been associated with discount pricing, was among those affected. On average, price increased by 25%, contributing to a decline in sales that led to cost-cutting in other areas. Certain product varieties were eliminated (e.g., barbecued chicken and country-fried pork), the number of sizes reduced (mostly smaller portion sizes), and in some cases cheaper ingredients used (substituting mashed potatoes for brownies). Although the changes have had a positive short-term effect on earnings, it is usually difficult to counteract the negative effects of falling customer satisfaction over time.

Beer: A Comfort Drink?

Beer drinker satisfaction has soared to an all-time high in ACSI. It too seems to follow the pattern of chocolate and sweets, but perhaps a bit less pronounced. The industry improved 1.2% to an ACSI score of 84, led by a 4% climb for Anheuser-Busch to a score of 85. Just a year after it was acquired by the Belgian-Brazilian conglomerate InBev, Anheuser-Busch matched its biggest ever single-year gain to reach its highest level ever. InBev has made a number of changes in business strategy—it sold the ten theme parks owned by Anheuser-Busch to reduce debt and focus on core business, cut over 1,000 employees, and overhauled management. The company has seen increased sales of lower-priced brands such as Natural Light and Busch and of newer products such as Bud Light Lime and Golden Wheat varieties.

Results for Miller and Coors brands, which market under a joint operating agreement, were mixed. Miller improved slightly, up 1% to 83, while Coors dropped 2% to 81, falling to the bottom of the industry. The Coors brand portfolio is composed of a greater proportion of high-end entities and more high-priced brands compared with Anheuser-Busch. In the midst of an economic downturn, customers typically look more to value for money. Coors drinkers report a sharp decline in value for money.

Tobacco: New Federal Taxes Make it Costly to Smoke

Customer satisfaction with tobacco products, largely made up of cigarettes, has never quite matched other nondurable products in customer satisfaction. Price has been an issue for a long time and it also seems that there might be less differentiation than the advertising budgets imply. This year, the federal government instituted a large tax increase on tobacco, from 39 cents to $1.01 per pack of cigarettes. As a result, there is a sharp decline in customer satisfaction, down 7.7% to an ACSI score of 72 for an industry that had never before seen its ACSI fall below 75. No company has been immune, with Philip Morris dropping 9% and Reynolds American 8%, both to a score of 72. In the past, a 10% price increase in tobacco products contributed to about a 4% decline in consumption. The ACSI model suggests the most recent tax hike will have a similar effect (-3.5%).

Personal Care & Cleaning Products: Clorox Cleans Up; Colgate Loses its Sparkle

Customer satisfaction with personal care and cleaning products was unchanged, with an ACSI score of 85, continuing a three-year record high for this category of nondurables. Clorox improved 1% to 88, tying its all-time high and making 2009 the thirteenth straight year the company has either led or tied for the industry lead. A total of 88% of Clorox products are the No. 1 or No. 2 sellers in their product categories and demand is increasing for Clorox disinfecting and cleaning products due to concerns about the H1N1 flu virus. Clorox was followed closely by Unilever, unchanged at 87, with Procter & Gamble and Dial next at 85 (unchanged) and 84 (-1%), respectively.

Customer satisfaction has been volatile for Colgate-Palmolive for the past several years. Its ACSI score rose 1% in 2006, fell 4% in 2007, and rose 7% in 2008. This year, Colgate drops again, falling 5% to 83. The company was tied a year ago for the industry lead, but now finds itself at the bottom, well behind Clorox and Unilever. Both pricing and quality have contributed to the fall. Colgate appears to be stuck in a pattern of rolling out many new products coupled with competitive pricing in one year, only to cut back on some products and increase price the next year.

Apparel: Levi Strauss from Worst to First

Apparel made the largest customer satisfaction improvement of all nondurables, rising 2.5% to an ACSI score of 82. Jones Apparel and Levi Strauss tied for the top spot with scores of 83. For Jones, this position is not new: The company led all companies a year ago. For Levi Strauss, the story is very different. The jeans maker rocketed from the bottom of the industry past competition to match Jones, rising 6%. Levi boosted jeans sales and expanded its retail network, including 74 new outlet stores. It also made a PR splash with more investment in green initiatives, including a Òcare tagÓ designed to encourage customers to recycle their clothing and a recommendation that its jeans be washed in cold water to save on energy. It is not clear that these things alone could have contributed to the rise in customer satisfaction, however. Perhaps Levi Strauss also benefits from a Òcomfort factorÓ similar to that produced by the chocolate makers. After all, Levi Strauss has been around for a long time and may well represent something familiar, trusted, and American.

Liz Claiborne also made more customers happy. Its ACSI score went up by 4% to 82, tying Hanesbrands (+3%) and the aggregate of smaller companies (+4%), followed closely by VF Corporation, which dipped 2% to 81. Improved customer satisfaction with Liz Claiborne may have benefited from famed fashion designer Isaac Mizrahi, who left Target last year to revamp the Liz Claiborne clothing line—his first designs appeared in the spring of 2009. Another contribution to higher customer satisfaction among the increasing number of price-conscious shoppers comes from new lower-priced offerings within the Kate Spade and Juicy Couture lines, its most expensive brands.