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Even in a weak economy, consumers — and businesses — are blurring the line over spending on ‘essentials’

By Paul Nolan | Thursday, May 15, 2008 With all the dire predictions of economic doom and gloom, the public was expected to cut back on many discretionary purchases.

Despite all the news stories about the gloomy economy, continued strong sales of everything from theater tickets to the new “Grand Theft Auto IV” video game indicate that the line between essentials and non-essentials has become awfully blurry for many consumers these days.

As each day’s headlines seemingly bring additional economic woes for consumers to fret over, marketers of luxury goods, live entertainment and other non-essentials are left to ponder whether there is even such a thing as “discretionary income” anymore — and if so, how to get their share.

Some businesses in Minnesota, however, see a silver lining to the cloudy economy that has everyone talking about cutting household expenses. Many of those we talked with are expecting — or, in many cases, merely hoping — that when consumers cut the cost of one non-essential from their budget, they’ll spend at least a portion of those savings on a different one — preferably something they’re selling.

One man’s recession can be another man’s rebound, these entrepreneurs say, and some have evidence to back up their claim, albeit often anecdotal.

Slump? What slump?

Economists are concerned that high gas prices will hit summer vacation industries particularly hard, but you couldn’t tell it by talking to Steve Loucks, a spokesman for Eden Prairie-based Carlson Wagonlit Travel Associates. Loucks said the company polled about 200 of its agents throughout the country in late March and early April and found 55 percent reporting bookings as strong as — or ahead of — last year at the same time.

“People seem determined that they are going to take a vacation,” he said.

That contention is borne out in first-quarter results for Walt Disney Co., which saw its net income rise 22 percent on surprisingly strong business at its theme parks and resorts (and TV networks), according to the Wall Street Journal. Revenue at Disney’s theme park unit increased 11 percent from the same period last year.

Some of Minnesota’s biggest companies are remaining generally upbeat even while expressing concern about the impact of slower consumer spending on their bottom line. Fifty-three percent of companies responding to a recent StarTribune survey of the state’s 100 top businesses said tighter consumer spending will affect their performance, while 47 percent said it would have “little or no effect.” Seven percent said they expect the effects to be “profound.”

The Federal Reserve Bank in Minneapolis foresees sluggish economic performance throughout the region. The national picture looks grim, too, according to an analysis on the Minnesota 2020 website by Christian E Weller that’s headlined “All Signs Point in the Wrong Direction.” Weller is a senior fellow at the Center for American Progress and an associate professor in the Department of Public Policy and Public Affairs at the University of Massachusetts in Boston.

Even so, Carlson Wagonlit, like many retailers, hopes that the federal stimulus rebate checks arriving in bank accounts and mailboxes nationwide will result in a short-term spike in business. “From the time the government signed that into law, we advocated spending it on domestic travel,” Loucks said. “What better way is there to put money back into economy?”

Although there is no agreement among experts on how much new spending will actually be generated, the federal stimulus rebate checks are expected to put $112 billion into the hands of about 130 million Americans in coming weeks.

Other than promoting turning rebate checks into travel experiences, Loucks says Wagonlit has not changed its marketing approach during the downturn. His best guess about continued strong bookings is that the travel agent’s regular clientele weren’t affected by the mortgage crisis or credit crunch and can absorb the hit of higher gas prices.

Closer to home, Nancy Krasean, director of communication for Cragun’s Resort in Brainerd, says bookings for the summer season are on par with last year. “Memorial Day weekend will be a big indicator, and it’s notorious for late bookings because people wait to see what the weather will be like,” she said.

Similar to past years, the resort is 60 percent booked for that weekend and typically fills up if weather cooperates. Cabins that are rented by the week often are booked a year ahead of time, so the economy didn’t affect that business.

Because of the attractive currency exchange rate, Krasean said, Cragun’s promoted more heavily to Canadian tourists earlier this year, and it appears to have paid off with increased Canadian bookings. A television advertising campaign in the Twin Cities is scheduled for May and June to coincide with the arrival of federal rebate checks, she said.

Megamall expands its marketing boundaries

Some local marketers are tailoring their strategy to the tight economy, however.

The Mall of America is making a more concerted effort to reach such regional markets as Kansas City, Omaha and Chicago on the theory that people will opt for more affordable car trips this summer rather than fly to farther destinations, according to mall spokesman Dan Jasper.

It’s interesting to note, however, that the MOA is making this push without spending a lot of extra dollars itself. One approach it’s trying is to send its official spokeswoman and fashion maven, Sara Rogers, to select cities to discuss fashion trends on local media outlets. While discussing what’s in style, she makes sure to mention that all of the latest fashions are available at the megamall.

Retailers are especially nervous about the signs of a prolonged decline. The Commerce Department recently reported that consumer spending rose less than 1 percent in March — the fourth month in a row that Americans reportedly eschewed shopping malls.

But if the parking lots at the MOA on weekends are any indication, loads of shoppers are still interested in browsing, if not actually spending. The east lots were loaded to capacity on a recent Saturday afternoon, and the first five levels of the West parking ramp were full as well.

Many clerks and store managers can’t comment on the record because of corporate restrictions, but after glancing left and right to make sure “The Man” wasn’t watching, several of them said business has been steady, despite what’s reported in the news.

“We’ve been hitting all of our goals,” said one of the white-coated cosmetic consultants at Macy’s Beauty Bar as music blared from a makeshift DJ stand and young women in brightly colored fashions and freshly made-up faces were on display. “Welcome to weekends at the Mall of America,” she said of the party atmosphere.

Downstairs in the more sedate surroundings of men’s fashions, a clerk said sales in that department also have remained steady. A jittery job market, he said, may actually help sales of suits and ties. “I think guys are feeling like they need to brush up a bit and really look sharp,” he said.

Of course, a nearby rack of sport coats at 40 percent off are the sort of thing that department stores have always relied on to keep cash registers ringing during downturns.

At the Bose store in the mall, there were plenty of browsers if not a lot of buyers. Doug Neale and his wife, Sandy, who were in town from Nashville, Tenn., for a coffee trade show, purchased a pair of high-end headphones for his portable stereo.

“I’ve wanted them for 15 years,” he explained. “They’re a luxury that I don’t really need, but I saw them in a magazine on the flight out and I decided to finally buy them.”

The Neales are semi-retired and say they are fortunate to be able to afford such non-essentials without worrying too much about shifts in the economy.

A big draw to the mall, of course, has always been the indoor amusement park, which officially adopted its most recent incarnation as Nickelodeon Universe in March. The rebranded park has drawn large crowds in recent weeks, in part by booking stars from Nickelodeon’s hit TV shows for appearances during the extended grand-opening ceremonies.

“Although Nickelodeon Universe has only been open for about six weeks, we’ve seen a double-digit increase in ridership versus last year, which is in line with our expectations,” Jasper said.

Of course, some of Nickelodeon Universe’s best promoters aren’t even on the payroll. Children don’t stop wanting, even when Mom and Dad are pinching pennies.

While waiting in line for the giant swings at Nick Universe on a recent Saturday afternoon, Minneapolis resident Richard Mongo, 38, said his 4- and 5-year-old daughters are already savvy to the ways of living on borrowed dimes.

“Every time I say I don’t have money for something, they say, ‘Show me the plastic,’ ” he said.

Is gambling recession-proof?

Jeff Maday can’t count on kids to bring the bulk of business to Canterbury Park Racetrack and Card Club in Shakopee, but the track will continue to promote Sundays this season as family days with free pony rides and such. A day at the races can be a lot easier on the family budget than other popular activities, Maday said. Adult admission is $5 and kids 17 and under get in free.

“A family of four can get in the door for 10 bucks. Maday said. You can’t go to a movie for that.”

Horse racing facilities around the country have reported a soft first quarter, and Canterbury is no exception. Revenue dropped 10 percent in the first quarter of this year after a 16 percent decline in net revenue for 2007. The continuing emergence of Internet wagering, a saturation of poker venues, the smoking ban and the downturn in the general economy have all contributed to Canterbury’s woes.

“We’re always told that gambling is recession-proof, but looking at numbers from casinos around the country, I’m not so sure. It’s a concern for all of us,” Maday said.

But if this season’s Kentucky Derby Day season opener at Canterbury is any indication, plenty of people still feel they have extra dollars in their pockets to wager on horses. A record attendance of 18,230 people wagered a total of $756,671 on nine races at Canterbury and another $830,584 on the Kentucky Derby itself.

Katie Weiss and Natalie Auger, both 30, donned colorful dresses and Derby Day bonnets and joined a group of more than 50 downtown Minneapolis residents who traveled en masse to Canterbury for the opener. Weiss, an attorney, and Auger, owner of a public relations and event planning company, say they haven’t felt crimped in terms of discretionary spending yet.

“I’m getting married this fall, so my fiancé and I are really watching what we spend,” Weiss said. “We talked about what we can afford on the way here. Hopefully he’s sticking to that.”

Culture gets squeezed

Gambling’s hardiness through past poor economies indicates that consumers find other areas in which to trim back spending before they turn to their vices.

Pity the poor art dealer (not to mention the struggling artists), says John Carver, owner of Vern Carver & Beard Art Galleries on Hennepin Avenue in south Minneapolis. The gallery, which recently moved from a downtown skyway location, keeps about 400 original pieces ranging in price from $500 to $5,000 on consignment.

Carver, whose father ran the business before him, said his regular customers are usually over 40 and span the economic scale. He attributes the slowdown in his business to a “general malaise” that set in after the Iraq War started and presidential politics grabbed center stage.

“People are not in the ‘fat and happy’ mood that marked the 1990s,” he said. “Nobody is buying the lobster dinner anymore, and we’re the lobster dinner. I tell people they should buy more art because they’re staying home more, so why not have a beautiful piece of art on the wall?”

But it appears most consumers are more apt to satisfy their base desires rather than go highbrow. “Grand Theft Auto IV,” the latest in a series of wildly popular violent and episodic video games, rang up more than $500 million in worldwide sales in just one week. More than 6 million units of the game have been sold since it became available on April 29.

Casey Shingledecker, assistant manager at a GameStop store in Plymouth, said the staff sold more than 500 copies of “Grand Theft Auto IV” at $64 each within the first five days.

As Colin Sebastian, a video game industry analyst with Lazard Capital Markets, told the New York Times recently, “People say that if consumers are down to their last $50, the last three things they’ll buy are milk, eggs and video games.”

Paul Nolan, who has written for Twin Cities Business magazine, Minnesota Law & Politics and Meetings Magazine, reports on the local business scene and writes general-interest feature stories.