2015, The Year of The Consumer

Cheaper oil, much cheaper oil! It was the Golden Goose of 2014 and consumers will benefit from it for the foreseeable future. We don’t have to expound the benefits here; we see the smiles at the fill up station.   At current prices, cheaper oil will save the average household approximately $600 in 2015 at current levels. We ask ourselves, how will that money be used?

As if cheaper prices at the pump were not a fantastic end to 2014, 2015 is off to an even better start. Not only is the price of gas continuing to fall everyday, but last week, Washington handed consumers another check. Mortgage insurance premiums (MPI) are being reduced by almost 40%, wisely so we might add, and all of a sudden 2015 is starting to look very interesting for the American consumer. We are certainly excited about the extra money in household pockets from oil, but this overdue and unexpected MPI news should turbo charge the economy. The average FHA-based loan will save about $960 a year, or just under the average monthly mortgage.

Here’s the question: what will consumers do with this unexpected $1,600 windfall? Here’s our take at Skick’D. . Historically, consumers push this cash back into the economy and we think this time won’t be any different. However, we think this time around will be unique with consumers trading up on the average price they are willing to pay for a product or service, i.e., more luxury products and aspirational purchases. We have seen this play out in the wine market. At the onset of the recession, the WSJ published an article, “Luxury Wine Market Reeled” (excerpted).

“…The slump continues as Americans continue to drink more wine overall. Recession-weary consumers, however, are buying more mid-and low-priced wines, causing a sharp fall off in sales of wines priced at $25 a bottle and higher.

Total U.S. wine sales rose about 5% in terms of volume in the first quarter from a year earlier, but wines priced at $25 a bottle and up fell about 12%…”

The question was presented: as consumers trade down and find great wines in the value category, will they ever return to the premium category? Well, as the following chart shows, (and as an occasional wine drinker I’ve seen it play out in my local wine store) US consumers are gradually starting to spend more per a bottle of wine.

2015 Charts

We see a similar parallel today in the retail environment and with consumer spending recovering. Consumers are opening their wallets, but still tepid when it comes to many purchases and are spending their dollars on value oriented products. However, with Consumer Sentiment at its highest level in eight years, we have good reason to be optimistic.

With a pepped up consumer and an additional $1,600 in their wallet, we see many of them coming back to the premium market. Whether consumers choose to eat a nice meal out more often or buy premium blue jeans, 2015 will be a good year for merchants.

To Your Success,

Skick’D

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