Coping with poor, confused consumers

October 25, 2010, 5:05 PM UTC

The growing number of Americans living below the poverty line is troubling on many levels, and it’s a problem that consumer companies can no longer ignore.

Why pay for cable when this old box still works?

According to new government data, one in seven Americans lives in poverty — the highest level in 15 years — and many more are staying above the poverty line only because of government benefits. Most of these people have virtually no money left over at the end of the month for discretionary spending on everything from clothes to cable.

This is significant for companies selling consumer goods and services — if they’re not necessary for survival, they’re more likely to be cut from household budgets. And as the unemployment rate remains high and government benefits continue to expire, it will become increasingly difficult to acquire new customers.

According to a report last week from Bernstein Research, the bottom 40% of households, with incomes averaging $18,600 after taxes, spend the majority of their cash on food (21.7%) and housing (51.5%). After transportation and health-care costs, these households are underwater by $1,000 per year. This means they have no money to pay off debts – let alone new clothes, a restaurant meal, or the latest smartphone.

Indeed, the new consumer is not only much more cash-strapped, but he’s also more inclined to save more until the fuzzy economic picture begins to clear. This was perhaps best captured last week when Coca-Cola (KO) CEO Muhtar Kent backed further U.S. stimulus spending. “In the US, the consumer is still confused; there’s still high unemployment and companies continue to deleverage,” Kent told The Financial Times.

Bernstein lays out exactly what this stark reality means for media companies, including cable, cell phone and other telecommunications firms. Media consumption has generally withstood economic hard times before, with TV being a less costly option for entertainment than going out to the movies, shows, or ballgames.

Disconnect between falling incomes and rising fees

Media companies grow their businesses in primarily two ways: by raising the prices for their services and by acquiring new customers. Both will become more challenging in this environment, as the pressure on consumer spending could tighten further, depending where government policies fall. The Social Security Administration did not give seniors a cost of living increase last year, and it’s unlikely an increase will happen this year. And while inflation has generally been low, consumers could see a steady rise in prices if the Federal Reserve decides next month to buy up more Treasury securities with newly-created money.

“What this means is that subscriber growth is going to be extraordinarily hard to come by,” Craig Moffett, senior analyst with Bernstein, says of media companies. “They are at risk of pricing themselves into irrelevance for the bottom half of Americans.”

For years, the cable TV industry worried about tech-savvy twenty-somethings cutting the cord on their cable, Moffett says. The reality today is that the cord-cutter is in his 30s, poor and simply can’t afford big media.

For now though, cable and satellite operators seem to be doing okay fighting off cord-cutting. The industry’s first decline in subscribers during the three months ending in June was mostly related to the troubled housing market that saw much smaller numbers of new households. But the average revenue per user for cable companies has risen by 24% during the past five years. Bernstein notes that, with incomes falling or remaining stagnant, that’s likely to slow dramatically, especially as low-cost alternatives like Hulu and Netflix (NFLX) grow. It remains to be seen what will happen in the coming months, but the future doesn’t look bright.

And the landscape for wireless telecommunications companies isn’t much better. This past year, most of the increase in spending by telecommunications firms has been concentrated in the top 40% of households that already have smartphones, according to the Bernstein report. Phone companies are hoping to seize that remaining 60% with data plans on smartphones that cost an extra $40 a month. But in fact, the spending by the bottom half of households has stagnated, casting doubt that the group will drive incremental average revenue per user.

“Given the evident technology risks racing the telcom and Pay TV sectors, that’s something that doesn’t exactly inspire confidence,” the Bernstein report notes. “If wireless [average revenue per user] declines, that lack of confidence could quickly turn to outright panic.”