The Risk-Averse Consumer

The Risk-Averse Consumer

Ken Cassar

I’ve been preparing for our upcoming Webinar on Retail Coping Strategies, where we will provide constructive advice to retailers on how they can best cope with the challenging retail environment that we’re in. This has led me to think about companies that are holding up well through the recession.

There are three companies that I’m particularly interested in: Walmart, Amazon, and Hyundai. Walmart’s US sales grew by 6.7 percent, profits by 11 percent in the fourth quarter of 2008. Amazon just announced that Q4 2008 sales were up 19 percent relative to the same quarter in 2007, with profits (yes, profits) higher than expected. While sales at competitors fell by as much as 55 percent in January, Hyundai’s US sales grew by 14 percent. There are two things that these three companies have in common:

  • They are all brands that are closely associated with value.
  • They all offer selling propositions that allay consumers’ non-price related perceptions of risk.

My working hypothesis is that what consumers are looking for, above all else in this economy, is alleviation of risk. I should be clear that a critical component of this alleviation of risk is reduction of household debt, which is causing consumers to hold off on purchases and seek lower prices. But I think that it’s bigger than that alone. When consumers are buying, they’re looking for sellers that offer a risk-free proposition.

Walmart, as the largest retailer in the world, carries with it a high degree of comfort. You don’t worry about whether you’ll have problems returning the digital camera bought at Walmart. They’re too big to sweat it. You don’t worry whether orders placed with Amazon will arrive in the expected timeframe. Hyundai’s comprehensive warranty and buyback programs mitigate the risks that you will be saddled with unexpected repairs, or with a lease payment that you can’t afford if you lose your job.

The thing that really impressed me about the financial results returned by Walmart and Amazon (I wasn’t able to find Hyundai financial data) for the 4th quarter is that both companies, in the most difficult economic circumstances that I’ve ever seen, grew both sales and profits.

The lesson that every brand should take away from this is not to be myopically focused on low prices. Low prices are important, but must be considered in the broader context of consumer risk management. Brands should be asking themselves how they can help consumers alleviate a broad portfolio of risks that they’re feeling, not just the need to pay less for each purchase that they’re making.

Join me on March 11th for the Webinar to discuss this idea in more detail.