Article

ACSI falls: Biggest slump since 2008

Strong showings for Amazon, Netflix, Newegg, Publix, Nordstrom, Kohl's not enough to bolster satisfaction.

February 14, 2011

This commentary on today's report from the ACSI is written by Professor Claes Fornell, the Donald C. Cook Professor of Business Administration, Stephen M. Ross School of Business, University of Michigan.

Even though the economic recovery has gained a bit more momentum as of late, it remains sluggish. With low job creation and deteriorating customer satisfaction, as tracked by the American Customer Satisfaction Index (ACSI), the uncertainty of what will happen to consumer demand is not going away.

Looking back, the overall ACSI score also fell before the economy went into recession, but as companies and employees tried harder to please their customers with better service and lower prices, the Index reversed direction and began to rise before the end of the recession. Now, however, the situation is different. ACSI has not improved since mid-2009. The fourth quarter of 2010 registered a further slide in aggregate buyer utility. The national index fell 0.5 percent to 75.3, the largest drop seen since the fourth quarter of 2008.

While this is not encouraging for either consumer demand or employment, the overall numbers don’t tell the whole story, and things may not be quite as serious as the aggregate suggests. Most of the current ACSI decline was due to a plunge in satisfaction with government services and gasoline. The latter was caused by rising oil prices, which do have a dampening effect on consumer demand and economic growth, but slumping satisfaction with government has much less of an impact on the economy.

Consumer spending in the final quarter of last year increased by 4.4 percent—the largest uptick in a long time. This rise, however, is likely to be an anomaly caused not by sustainable income growth or satisfaction-fueled demand, but by slight increases in income, savings reductions, and pent-up demand. With a declining ACSI, it is difficult for spending growth of this magnitude to be maintained. Adjusting for the lack of impact that government ACSI results have on overall ACSI, the weak customer satisfaction numbers in Q4 point to a more modest spending growth of 3.0 percent to 3.4 percent for the first quarter of 2011.

The fourth quarter drop in customer satisfaction with the retail sector, caused in large measure by the decline for gasoline, belies the fact that some industries actually strengthened their customer relationships and many individual companies made gains. Both department and discount stores and specialty retailers inched up for a third straight year, improving by 1.3 percent to ACSI scores of 76 and 78, respectively. Fourth quarter retail sales also were up 7.8 percent from the previous year, and total 2010 sales rose 6.6 percent. Customer satisfaction with supermarkets and drugstores declined slightly, falling 1.3 percent to 75 and 77, respectively, as prices for many types of merchandise sold at these stores rose throughout the past year. Among individual companies, the number of gainers and decliners was about even: 47 percent improved, 40 percent declined, and 13 percent were unchanged.

Gasoline
Customer satisfaction with gas stations plummeted. The industry’s ACSI score fell 7.9 percent to 70—the largest-ever single-year plunge for gas. Price typically has a stronger impact on gasoline than on any other industry and a nearly 20 percent rise in gas prices over the past year took a heavy toll. Gasoline ACSI scores and price tend to move in opposite directions. Between 1998 and 2007, when prices at the pump doubled, satisfaction generally trended downward.

Supermarkets
Customer satisfaction with supermarkets slipped for the first time in three years, falling 1.3 percent to an ACSI score of 75. Higher food prices were a major contributor—overall cost of food rose 1.5 percent in 2010 after declining in 2009, and some major food items increased much more. Despite a small 2 percent drop, Publix Super Markets remained well ahead of all other chains, leading the industry with an ACSI score of 84—still one of the highest scores for any retailer. At the other end of the spectrum, Wal-Mart’s supermarket business was unchanged at 71, the lowest score in the industry. While Publix thrives on the strength of its customer service, Wal-Mart continues to be a place where people shop because of price. Service has a strong, positive impact on customer satisfaction, but coupling low prices with low quality does not.

Whole Foods, up 4 percent to 79, and Kroger, unchanged at 78, both followed Publix. Just three years ago, Whole Foods lagged the industry even though the quality of its products was deemed to be high. There is a point (and it is easy to get to in a recession) where high quality does not make up for high price and that was the problem for Whole Foods. Lately, the company has been more alert to consumer price sensitivity, expanding its lower-priced store brands, reducing prices on meat and produce, and offering bigger and more frequent price promotions. Whole Foods’ ACSI gain since 2007 is 8 percent, more than any other grocery retailer. Its share price followed suit with a jump of 84 percent during the past year.

Supervalu is a different story. A year ago, the company finally saw customer satisfaction recover to the level prior to its 2006 acquisition of Albertsons, but the ACSI gain did not last and was followed by another drop. Supervalu slid by 4 percent to a score of 74. Despite its low-price emphasis (discounter Sav-A-Lot is by far its largest chain) Supervalu seems to struggle as other food retailers have become more competitive on price. Amid layoffs and store closings to reduce costs, revenues shrank by 10 percent and stock price plunged 41 percent over the past year.

Health & Personal Care Stores
Customer satisfaction with health and personal care (drug) stores dipped slightly, down 1.3 percent to an ACSI score of 77 following four years of stability at 78. The aggregate of smaller chains improved, up 3 percent to lead the category at 81. This gain, however, was not enough to offset flat or declining customer satisfaction among the three largest drugstores. Walgreen, the largest chain, was unchanged at 77, followed by Rite Aid, down 1 percent to 75. Rite Aid’s drop was not large, but the company has faced financial challenges since its 2007 acquisition of nearly 2,000 Brooks/Eckerd stores. Some stores have been closed amid declining sales, and it was not until recently that Rite Aid’s stock price showed substantial improvement.

In 2008 and 2009, CVS Caremark was tied with Walgreen for the lead among the three large chains, but fell to the bottom of the industry in 2010 with a 4 percent drop to 74. Problems with customer service appear to be at the center of the decline. CVS Caremark cut costs in response to lower revenues throughout 2010, and that too might have had an adverse effect on customer service.

Department & Discount Stores
Unlike supermarkets and drugstores, customer satisfaction with department and discount stores has trended upward over the past three years. This time, customer satisfaction improved 1.3 percent to an ACSI score of 76—the industry’s highest since 2003. Strong value for money seems to be a major reason. Department and discount stores are the only retail category where "value" is higher than "quality" in the ACSI model. But this is not the case for upscale retailer Nordstrom, in the lead with an ACSI score of 82 (a 1 percent dip from a year ago). Discounter Kohl’s followed closely behind Nordstrom with an improved score of 81 (+3 percent). These two retailers have been at or near the top of the industry for many years, but for different reasons—Nordstrom because of service and quality and Kohl’s because of value and price. J.C. Penney was not far behind Kohl’s, tied with Dollar General at 80 after both retailers made 1 percent gains.

Wal-Mart gained 3 percent to 73, its highest ACSI score since 2004 and the third straight year of improvement. Wal-Mart benefits from its strength in keeping prices low, but its customers continue to rate quality of both merchandise and customer service lower than any other competitor. As a result, even though better value for money helps the world’s largest retailer improve customer satisfaction, its ACSI score remains at the bottom of the industry.

Macy’s made the largest upward move, jumping 7 percent to an ACSI score of 76, an all-time high. Major restructuring and new customer-focused efforts may have paid off, particularly because of better customer service. Macy’s has emerged from a series of complex mergers and acquisitions, evolving from multiple regions into a national brand. This transformation seems to have generated efficiency in operations, with refreshed stores and products across the board. Sales grew 6.6 percent for the year and Macy’s stock price surged by 60 percent.

Specialty Retail Stores
Customer satisfaction with specialty retailers climbed 1.3 percent to an ACSI score of 78, marking a third straight year of improvement and setting a new all-time high. Barnes & Noble (-2 percent) fell back into a tie for the industry lead with Costco (+1 percent) at 82. Despite its small drop, Barnes & Noble still holds an advantage over rival Borders, which slipped 1 percent to 80. Both retailers, however, continue to trail Internet rival Amazon (ACSI of 87) by a wide margin. Similarly, Costco continues to outdistance its warehouse club competitor Sam’s Club, down 1 percent to 78. Home improvement retailer Lowe’s (down 3 percent) and Best Buy (up 4 percent) followed at 77, just below the average for the category.

Two of the three measured office supply chains made sizeable gains. Staples improved 5 percent and Office Depot vaulted 7 percent, both to all-time high ACSI scores of 81. A stronger emphasis on customer service and on rewards programs with better value for money, according to customers, helped lift both retailers. By contrast, OfficeMax dropped 4 percent to 74, erasing a gain in 2009 and tying clothing retailer Gap (-1 percent) at the bottom of the specialty retail category. Customers see value in OfficeMax prices, but give low marks to service that failed to keep up with their expectations. As a result, the company has experienced eroding sales of late.

Home Depot rose to an ACSI score of 75 with a gain of 4 percent, marking a third straight year of progress and moving a long way from its low of 67 in 2007. While rival Lowe’s stays ahead of Home Depot for a ninth straight year, the latter has closed the gap significantly. The ACSI increase lifted Home Depot out of the industry basement for the first time in six years. Nevertheless, the company’s customer service remains relatively weak compared with most other retailers.

Internet Retail
After four years of relatively stable scores, customer satisfaction with online retail fell 3.6 percent to an ACSI score of 80. Despite this decline, customer satisfaction with Internet shopping remains much higher than satisfaction with in-store shopping. Online sales grew at a faster pace too: 11 percent compared with 2.5 percent for all retail sales. Nevertheless, while the volume of online shopping continues to grow, it is still comparatively small. Internet sales accounted for no more than 7 percent of total U.S. retail sales in 2010.

The ACSI decline for e-tail was driven largely by a big drop among smaller online retailers whose aggregate score fell 6 percent to 78, well below the scores of the larger companies. Size seems to matter when it comes to ability to price, make concessions on shipping costs, and create attractive sales promotions.

Amazon maintained the lead in the category, up 1 percent to 87—the highest ACSI score for any retailer, whether Internet or brick-and-mortar. Amazon’s improvement, coupled with a similar drop for Netflix (-1 percent to 86), resulted in a swap of the two top slots from one year ago. Newegg lost 2 percent to 84, while Overstock followed just behind, up 1 percent to 83. eBay made the largest gain among all Internet retailers, improving 3 percent to 81, although this was not enough to move the company ahead of any of its large competitors. eBay continues to face customer satisfaction tribulations as a result of putting individual buyers in touch with individual sellers, not all of whom are up to acceptable standards of service and reliability.