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American consumers are a happy lot, and that bodes well for retailers this year. The University of Michigan's latest customer satisfaction index suggests spending will grow as much a 4.1 percent this quarter.

The American Customer Satisfaction Index (ACSI) hit an all time high in the fourth quarter of 2006. It jumped to 74.9 on a 100 point scale, up nearly 2 percent from the previous year. This is the highest score since the University of Michigan first created the ACSI in 1994, when it measured 74.8.

ASCI has been a consistent predictor of future consumer spending. Therefore, the latest measure suggests that satisfied consumers will continue to prop up the economy. The researchers predict consumer spending growth of between 3.5 and 4.1 percent this year.

"In view of these results, it is not surprising that the consumer continues to lift the economy despite the housing slump," says Claes Fornell, director of the University of Michigan's National Quality Research Center, which compiles and analyzes the ACSI data. "The economy may not be coming in for a soft landing." "With the confluence of a number of favorable economic factors, there may be no landing at all," Fornell continues. "Rising wages, little inflation, and falling unemployment, combined with higher customer satisfaction and strong consumer confidence, suggest the trend in spending growth will continue to drive economic growth."

This year's index is different from past ones, Fornell says. "The two big categories that impact customer satisfaction are quality in all its forms, including products and services, and price. The effects from price is usually much weaker than quality. This time, both categories improved. Customers indicated that the value for the money is getting better."

The ASCI report says, "American consumers continue to spend money as if there is no tomorrow. Households spent more than they earned in 2006 by borrowing more and/or dipping into their savings.

"Under such circumstances, the traditional predictors of future spending (income and wealth) hold less sway. Rather, spending is becoming more dependent on the gratification consumers learn to expect from their consumption," the study concludes.

Retail Satisfaction Shines
Satisfaction with the retail sector outpaced overall satisfaction. The sector includes department and discount stores, specialty retail, supermarkets, gas stations and health and personal care stores. Satisfaction for that group jumped 2.8 percent to score 74.4 on the scale. The specialty retail stores sub-sector improved 1.4 percent to 75.

Costco, once again, led the retail industry. Its score was up 2.5 percent to 81, its highest score ever and the highest in all of ACSI. The biggest gain, however, went to Best Buy, with a 7 percent increase, to reach 76 on the index. Satisfaction with Home Depot dropped at the end of 2005, while it rose for Lowe's. This year, both companies reversed course. Home Depot's ASCI score rose 4.5 percent to 70, and Lowe's dropped 5.1 percent to 74, its lowest score ever. "The gap in customer satisfaction between Home Depot and Lowe's is closing," Fornell says, "but Lowe's still holds a significant lead." The challenge for Lowe's, he says, "Is to maintain strong customer service, even as they accelerate growth and open more stores."

One component of retail that did not improve in 2006 is department stores and discount stores. Taken together, this segment slipped 1 percent to 74. Kohl's maintained its leadership position with a score of 80, followed by JC Penney, which held steady at 78 for the second year in a row.

Target and Dillard's, which ranked at 77 and 75, on the index, each dropped 1.3 percent, while Federated Department Stores registered 71, a 4.1 percent slide compared with the year before. Fornell says, "Consolidation, by and large, poses a challenge from a combination of things."

"Especially in the case of Federated, the challenge comes from streamlining, cost-cutting and store closures, and the absorption of so many units makes it more difficult to manage. Mistakes happen." Satisfaction can recover, he adds, "But it usually takes awhile; as much as several years."

Satisfaction with supermarkets improved slightly, up 1 percent overall to 75 on the index. Publix reached a new high, up to 83, a 2.5 percent increase. ASCI analysts point out that it is partly employee owned, and has a reputation for good customer service and a family-friendly atmosphere.

As SuperValu absorbed some Albertson's units, its score dropped 4 percent to 74. Albertson's was a poor performer before being acquired, and the index indicates that its less satisfied customers have impacted SuperValu's score.

The drug store industry as a whole rose 2.6 percent, and CVS led with a 5.4 percent rise to 78. Rite Aid also made a gain, up 4.2 percent to 75. As both of these chains add more outlets, they defy the notion that mergers compromise customer service. New computer technologies help drug stores keep interconnected, which allows prescriptions to be refilled at any store, and the researchers conclude that more locations mean greater convenience for customers.

Web Outshines Stores
Online retail is one of the highest scoring industries measured on ACSI. In the latest ranking, its overall improvement was up 2.5 percent to 83 on the scale. At a ranking of 88, Barnesandnoble.com continued to lead the industry and was up 1 percent over the previous year. At 87 on the scale, Amazon.com is not far behind.

"The Internet is a hyper competitive environment, and companies need to evolve and adapt quickly to customer needs and expectations or risk losing them," says Larry Freed, president and CEO of ForeSee Results. "The improved scores are evidence that eCommerce companies are working hard to maintain and improve the industry's extremely high customer satisfaction standards."

Among online auction sites, eBay maintained its leadership, despite a 1 percent drop to 80 on the scale. Freed says, "eBay is winning the auction category handily, but should be worried that they are still considerably behind Amazon.com, since the two companies increasingly complete.

"Amazon is selling more used goods, and eBay now sells many items brand new and direct from the retailer. The lines between auction sites and retail sites get more blurred every year," Freed points out, adding, "eBay will need to bring more innovation to satisfy customers like more traditional retailers do."

ACSI is produced by the University of Michigan's Ross School of Business, in partnership with the American Society for Quality and CFI Group. It is supported by ForeSee Results, which is the corporate sponsor of the eCommerce and eBusiness measurements.

Article ID: 113