In some regards, the 2008 lull was just another cyclical contraction. By other measures, the worst recession in decades is hardly "just another" anything. Either way, retailers' adaptation (or failure to adapt) to the environment was a sobering reminder of just how fickle consumers can be.
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This bout with weakness may also be one that's only begun to separate the wise from the foolish retailers. So, here's a look at the "new" consumer, and a look at how retailers will thrive in the new era of consumerism.

The "New" Consumer
A handful of qualitative and quantitative measures of new consumer attitudes have repeatedly popped up in polls, interviews and anecdotes.

For instance, in a recent Money Magazine survey, 88% of readers said they'd be more frugal, while 73% planned to focus less on materialism. Other research has verified that Wal-Mart (WMT) did indeed see a surge in market share during the recession, grabbing another 3% of the average consumer's disposable income.

But is it permanent? Perhaps General Electric's (NYSE:GE) chief Jeffrey Immelt said it best with "This economic crisis doesn't represent a cycle; it represents a reset." The Wal-Mart market share study agreed, citing how the retailer's "perceived value" would retain newly-won customers unless Wal-Mart's competition could lower prices by an average of 7%.

You can slice it however you want, but the idea is still the same ... consumers are going to be more hesitant, indefinitely.

Doing It Wrong
The whole "cheap chic" thing worked for Target Corporation (TGT) up until 2007. When a nasty recession strikes though, even cheap chic is considered to be an undeserved guilty pleasure that goes unpurchased. Target's art deco-ish branding never changed while the economy was imploding either, leading one to wonder if they're committed to it to a fault.

Lesson learned: Hip branding still isn't enough to overcome the most dire of consumers' financial concerns.

There's a reason Abercrombie & Fitch (ANF) revenue earnings started to fall in 2007, with a swing to losses earlier in the year. The recession is the short answer; the long answer is because A&F wouldn't lower prices to save the world - part of a value-preservation effort. However, that in itself isn't a deal-breaker.

The preservation of perceived value is moot if the fashion value of your product line is fading. And, given that Abercrombie & Fitch is still selling the same plaid flannels and gray fleece it was selling a decade ago while fashions have taken on a funkier twist, A&F's "classic" look just doesn't command teen attention like it used to. Were it one or the other, it would almost be forgivable. But, Abercrombie & Fitch is neither cheap nor as chic as it used to be.

Lesson learned: The name on the label isn't nearly as important as it used to be. Consumers want fresh looks more than a particular brand name, especially if a premium price is paid.

Doing It Right
Wal-Mart did many things well during the recession, but one small act encompasses them all: Wal-Mart dominated the idea of value when the economy was in the gutter. If you think you've seen that familiar, yellow smiley face rolling back Wal-Mart's prices a little more than usual, you're not crazy - the retailer was one of the few that actually increased advertising frequency as the recession wore on.

And what were the ads all about? They're visually explicit, showing that prices are going down at Wal-Mart, and value is going up. The blatant, almost juvenile message is still effective as the company has breezed through the recession with modest sales and earnings increases other retailers envy.

Lesson learned: If consumers seek value, don't mince words - tell them you offer it.

And finally, how did Aeropostale (ARO) do better in 2008 than in 2007? For that matter, how is 2009 on pace to outperform 2008? At first glance ARO is just another Abercrombie, Gap or Urban Outfitters, though the fashions are at least as current here as they are anywhere. Aeropostale does something those other names don't do as often, it uses coupons and sales to drive business. The branding image doesn't seem to have suffered for it, and the bottom line certainly hasn't either.

Lesson learned: Brand names and value pricing can mix without hurting the image. The optimal mix seems to somewhere between what Abercrombie is doing and what Target is doing. Aeropostale's branding is cool, while it's pricing conveys bargains.

Bottom Line
Are these the only lessons? No, but they're among the most important ones that will drive consumer spending trends for several years. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)

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Tickers in this Article: WMT, TGT, ANF, ARO

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