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1. The Leaner Baby Boomer Economy - BusinessWeek file:///Users/timothy/Desktop/b4141026524433.htm.html
COVER STORY July 23, 2009, 5:00PM EST
The Leaner Baby Boomer Economy
The downturn is putting a crimp on baby boomers' free-spending ways, and the likes of
Mercedes and Starwood Hotels are scrambling to keep up
By David Welch
Mercedes is the quintessential boomer brand. Drive down an American highway, and odds are good that the
person piloting the Benz in the next lane was born between 1946 and 1962. And Mercedes-Benz (DAI) has
prospered right along with America's huge postwar generation. Back in 1986, when the first baby boomers
turned 40, Mercedes sold 99,000 cars in the U.S. In 2006, when those boomers hit 60, the automaker moved
almost 250,000 vehicles, a fifth of its global total.
This year, Mercedes will sell a third fewer cars in America. In Montvale, N.J., Kristi Steinberg, who runs Benz's
North American market research operation, has a nagging fear: that sales won't recover for a long time because
boomers, history's wealthiest generation, are tapped out. "I don't know if anyone knows yet if this is a blip," she
says, "or a defining moment like the Great Depression."
Executives such as Steinberg always knew boomers would curb their free-spending ways as they approached
retirement. But not in their most nightmarish imaginings could they have predicted that an economic maelstrom
would cripple the customers they have courted and counted on for 30 years.
FAITH IN RISING MARKETS
When 79 million people—nearly a third of Americans—start spending less and saving more, you know it won't be
pretty. According to consulting firm McKinsey, boomers' conversion to thrift could stifle the economy's hoped-for
rebound and knock U.S. growth down from the 3.2% it has averaged since 1965 to 2.4% over the next 30 years.
"We would have gotten here in 5 or 10 years as boomers retire, but we pushed it up," says Michael Sinoway,
managing director of consulting firm AlixPartners. "Now [companies] are scared things won't come back." And
that's why everyone from Mercedes to Nordstrom (JWN) to designer Vera Wang are scrambling to remake
themselves for the Incredible Shrinking Boomer Economy.
Not so long ago, boomers were never going to die. Filled with a self-confidence born of unprecedented
prosperity, many thought rising markets would assure their future. If the economy faltered, well, it would rebound
more strongly than ever, as it had so many times before. And so boomers spent—and borrowed—as if there
were no tomorrow.
Meet Tim Woodhouse, 56. He owns Hood Sailmakers in Middletown, R.I., a business that helped finance a plush
life. Woodhouse owns a boat, five Ducati motorcycles, and every few years treated himself to a new Porsche
911. He figured he'd retire when he felt like it. Then the markets crashed, the economy tanked, and suddenly
Woodhouse felt a lot poorer. In April, with business slowing and his real estate holdings leaking value,
Woodhouse hit the brakes. "I was scared," he says. "My net worth took a real hit." Woodhouse sold the Porsche
and bought a Mini Cooper. The boat spends more time tied up these days than out on the water. He and his wife
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2. The Leaner Baby Boomer Economy - BusinessWeek file:///Users/timothy/Desktop/b4141026524433.htm.html
dine out less often, and they don't entertain at home much either.
Woodhouse and millions of boomers like him are doing what people normally do when they near retirement:
They're living more frugally. Companies have long factored in this actuarial reality, gradually tweaking their
products and marketing to appeal to the next generation. With boomers, however, many companies became
complacent. It wasn't that they ignored younger consumers but that they counted on boomers to keep spending
longer. And why not? Until recently boomers typically reached their spending peak at age 54, according to
McKinsey. Contrast that with the previous generation—a thriftier bunch whose consumption typically peaked at
47.
Now many companies are scrambling to appeal to Generations X and Y. You can already see this thrust in the
stores. Clothing designer Vera Wang is selling a casual line called Lavender aimed at twenty- and
thirtysomethings. It's fashion, but not the pricey garments the company typically has sold. Meanwhile, says
Wang, her namesake brand needs to get a lot less expensive. In one instance, Wang made a high-end dress
using fabric that costs $5 a yard instead of $12 but used the fabric in several layers to give the garment a richer
look. As a boomer herself, Wang, 60, feels her generation's pain. You don't have 30 years to reinvent yourself,"
she says.
Even as Mercedes continues to target boomers, it has quietly recruited 500 people aged 20 to 32 for a focus
group it calls Generation Benz. Mercedes researchers are seeking their views on the economy, car ads, model
designs, and more. The automaker sent 20 Generation Benzers into dealerships wearing flip-flops and other
casual attire to see how much attention they received. Four of the 20 were ignored. The results, says Steve
Cannon, vice-president for marketing, served as a wake-up call to Mercedes dealers "that we have to start
paying a lot more attention to tomorrow's customers, especially if tomorrow is coming faster than we thought."
VALUE SHOPPING
Can younger consumers pick up the slack? Consider the demographics. Generation X, Americans born between
1964 and 1980, is generally estimated to be about two-thirds the size of the boomer cohort. And with boomers
working longer, especially since the crash wiped out many retirement funds, it may take longer for Xers to move
into their prime earning (and spending) years. And what about Generation Y, the 81 million-strong group born
between 1981 and 1994? Right now, 14% are unemployed and will have their own hole to claw out of when the
economy revives, according to Edward F. Stuart, who teaches economics at Northeastern Illinois University. In
other words, companies will need boomers for years to come.
The trick will be finding a way to fulfill the needs and wants of a generation that is used to being catered to—but
is now on a budget. Timothy Malefyt, an anthropologist who studies consumer trends for the ad agency BBDO
New York (OMC), argues that boomers, having ridden a wave of technological change, are highly adaptable and
well versed in problem-solving. (Or at least they see themselves as such.) Already, he says, they are making a
virtue of value shopping, once viewed by this group as hopelessly déclassé. For many boomers it's no longer
about keeping up with the Joneses, it's about outthinking them. "If you make boomers feel they've failed, you'll
lose them," Malefyt says. "They want to feel they've outsmarted the system or their circumstances."
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3. The Leaner Baby Boomer Economy - BusinessWeek http://www.businessweek.com/magazine/content/09_31/b4141...
COVER STORY July 23, 2009, 5:00PM EST
The Leaner Baby Boomer Economy
(page 2 of 2)
That's why some companies are coalescing around "cheap chic," a marketing conceit that has become
synonymous with Target (TGT) but also has been tried by the likes of JetBlue, Ikea, and Mini. The latter is owned
by BMW, another classic boomer brand. BMW didn't plan it this way, but the Mini is one solution for a company
whose cars are becoming too pricey for many boomers. A fully loaded BMW 3 Series costs $40,000 plus
change; a comparably equipped Mini: $25,000. The Mini, while a feat of engineering and retro style, can't
compete with a BMW, which the company bills as "the ultimate driving machine." But the Mini possesses cheap
chic in spades. In recent months, says BMW, fiftysomethings have been trading in their Bimmers and other
luxury brands for Minis.
PAMPERING ON A BUDGET
Starwood Hotels & Resorts Worldwide (HOT) has embarked on a crash course in cheap chic—or what it prefers
to call "style at a steal." The chain has long appealed to the boomer yen for luxury and pampering. Its high-end
W, Sheraton, and Westin hotels offer spacious rooms, well-staffed front desks, valets, and extensive room
service menus. So the polyester sheets and small-bar soap that typify the value hotel experience wouldn't do.
Starwood's 40-year-old chief of specialty brands, Brian McGuinness, also knew boomers grew up challenging
convention and still like to feel that they're on the cutting edge. But they also demand creature comforts. "They
once drove Beetles and ended up in Bimmers," McGuinness says. "We wanted to strike that balance." Plus,
don't tell them but boomers are getting older and presumably creakier. So edgy can't equal bare-bones
minimalism.
After six months of research and brainstorming, Starwood came up with two cheap chic hotel chains: Aloft,
named to echo the "urban cool" of loft apartments, and Element, a low-cost option aimed at people who prefer
suites with every "element" of their daily lives—including spa-like bathrooms. Early last year the team mocked up
an Aloft prototype and invited some boomer-age guests to stay. The mock hotel had an aggressive neon color
palette, piped-in scents reminiscent of an Indian spice market, and garage band tunes on the sound system. To
help bring the room rate down to the $150-to-$170 range, they cut out full-service restaurants, room service, and
valets. The test subjects were fine with parking their own cars, and most said they'd rather explore and find their
own restaurants than eat in their rooms. The garage music? Not so much. Starwood replaced it with
contemporary rock and international music. The neon palette gave way to muted tones, and a mild citrus
replaced the spice.
Starwood has opened 25 Aloft hotels so far, and McGuinness says occupancy rates meet or exceed the average
in most metro markets. Starwood won't say if the downturn prompted it to accelerate the rollout of its new hotel
brands. But the company is opening two Aloft hotels each month, the fastest rate the industry has seen. David
Loeb, a Robert W. Baird analyst who has been covering the hotel industry for years, says Aloft's ambience may
be too hip and jarring for fiftysomethings. But he says if the chain finds the right balance, it might appeal to
boomers and Generations X and Y. Starwood is advertising the new chains heavily online. "Boomers and Gen Y
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4. The Leaner Baby Boomer Economy - BusinessWeek http://www.businessweek.com/magazine/content/09_31/b4141...
congregate in the same places on the Web," McGuinness says.
Starwood started changing its approach to boomers before the economy went south. Other companies are
adjusting on the fly. OSI Restaurant Partners has watched its eateries lose boomer customers, whether
middle-class types who frequented the company's Outback Steakhouse and Bonefish Grill restaurants or
wealthier people who once dined on filet mignon at the more upscale Fleming's Prime Steakhouse & Wine Bar.
OSI's chief operating officer, Paul E. Avery, reduced menu prices and offered smaller cuts of beef at Outback to
maintain margins before retiring in early July. The company has gone on an ad blitz pushing the more modest
portions for $9.99. This is obviously a tricky balancing act at Outback, where a big slab of meat was the chain's
main attraction.
The good news, says Chief Branding Officer Jody Bilney, is that people who order the less expensive entrées
typically end up buying dessert or more alcohol, so the average ticket is still about $19 per person. At Fleming's,
OSI is offering more wines under $10 a glass and a fixed-price menu that caps everything but drinks as low as
$36 a person. Before the downturn diners typically spent $60 apiece. OSI is responding to a recession but is
prepared to run its business this way if boomers remain frugal over the long run. "If anyone tells you they know
that the impact of the last 12 months is permanent or temporary, they're blowing smoke," Bilney says.
Nordstrom isn't waiting to find out. The purveyor of affordable fashion believes that its customers—many of them
boomers—will be under pressure for years to come. So even as it starts building fewer full-price department
stores, Nordstrom has tripled the pace for opening lower-priced Nordstrom Rack stores. It will open 13 in 2009
and nine next year. Rack stores offer Nordstrom's usual name brands but for 30% to 70% less than they fetch in
the main stores. Nordstrom figures boomers still want fashion, but at a discount.
What many companies are attempting to do now has worked in the past. After the crash of 1929 few people
could afford a Cadillac, so General Motors (GM) created a budget model to keep its luxury sales going. The 1934
LaSalle had art deco touches, including chrome portholes along the hood. To cut costs, GM stuck the car on an
Oldsmobile chassis and gave it a smaller engine. The LaSalle's cheap chic was a hit with Depression-era
drivers, and when the economy recovered, Cadillac again became a totem of material success. Of course,
America was about to experience the greatest boom in history. That's unlikely to happen this time.
With David Kiley
Welch is BusinessWeek's Detroit bureau chief.
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