Companies that once fed Americans' luxurious lifestyles now feel the squeeze of a penny-pinching market. Can Starbucks and others adapt to the new age of value?
Goodbye, $5 coffee. So long, gourmet supermarket food, $3,000 handbags and McMansions. Adios, expensive shows and gambling tables in Las Vegas.
We loved you during the bubble days, when we had extra money and credit was easy. Lots of us didn't mind paying a premium for food and clothing, popping for lavish trips and entertainment or taking out a mortgage for way more house than we needed.
It was fun to pretend we were rich.
Now, with the bubble burst, we're worried about losing our jobs. We don't trust the economic rebound, and we're pretty sure taxes are going up soon. And we'll probably be worried for quite a while.
As a result, say the experts who study such things, many of us are adopting much more frugal lifestyles. Oh, we're still spending, as the 3.6% increase in holiday shopping shows. We still splurge on little luxuries, as I suggested a few months ago.
But if there's a cheaper alternative on the market, a lot of us will buy it.
That brings us to the challenge facing many of the companies that used to post big profits and fast growth by selling us the good life -- a list of once-trendy or posh names including Starbucks (SBUX, news, msgs), Whole Foods Market (WFMI, news, msgs), Saks (SKS, news, msgs), MGM Mirage (MGM, news, msgs) and Toll Brothers (TOL, news, msgs).
Sure, you've got some great products. Starbucks can perk a luscious latte. Whole Foods has beautiful produce and a killer meat counter. But we're in a new age of frugality. We're adjusting. Can you?More from MSN Money10 pros' stock picks for 201010 stocks for the next 10 yearsAmerica is hiring again (sort of)Get ready for the Roaring '10s7 companies that may not see 2020The new age of value "We're absolutely finding that a new frugality has taken hold, one that seems to have some staying power," says Krista Faron of market research company Mintel, which tracks consumer spending patterns. It's playing out across all retail sectors, including fashion, food and home improvement, Faron says.
"Yes, this is a new age," agrees Ken Perkins of Retail Metrics. "Consumers are much more focused on value now. Before, it was all about coming home with the latest handbag. Now it's about shopping your closet."
Here's some of the hard evidence: As a group, December sales at discounters like Costco Wholesale (COST, news, msgs) and Target (TGT, news, msgs) advanced 3.9%, compared with a 0.4% decline at department stores like Saks and Nordstrom (JWN, news, msgs), according to analyst estimates compiled by Thomson Reuters.
Tips for frugal living
In short, while the stocks of these companies have had a nice run from their March 2009 lows, this is a good time for investors to be wary. Starbucks' coffee wars To be sure, these companies are fighting back. But the things they're being forced to do make them look more like their lower-brow competitors. It'll be a while before they're trendy again or growing quickly, two factors that can earn companies higher stock prices.
Take Starbucks: The landmark coffee chain now stocks supermarket shelves with its products, including a popular -- and frugal -- single-serve coffee called Via that avoids the waste of brewing a full pot. (Brewing a pot is still cheaper, though.) It now offers standing discounts such as a $1.95 grande iced coffee and a deal that lets customers pair a breakfast item with a drink for $3.95. It has adjusted its rewards card so that consumers earn more points for more visits rather than just a flat discount. Starbucks has even sneaked into Subway sandwich shops, where it sells a line of coffee called Seattle's Best.
Starbucks is also dealing with new frugality by being more frugal itself. In its fiscal year ending in September (the latest period for which numbers are available), it squeezed out an impressive $580 million in costs. But problems persist. Worldwide, coffee lovers spent $592 million less at Starbucks in that fiscal year than a year earlier.
It's pretty clear where a good part of the money is going. During the first nine months of last year, McDonald's (MCD, news, msgs) posted solid sales growth, and the chain cited its competitive premium coffee offering, called McCafé, as one of the main reasons.
In short, chances are slim that Starbucks will get back to its glory days anytime soon. "We doubt the firm can return to its lofty historical growth numbers," Morningstar analyst R.J. Hottovy says. Starbucks projects low- to mid-single-digit revenue growth this year.
So it's no surprise that Wall Street analysts have a median price target of $24 on Starbucks' stock, according to Thomson Reuters. The stock was trading just above $23 this week.
Continued: Whole Foods' price problem
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