Economy

Shopper Satisfaction Takes Another Hit,
But Chocolate Gives Consumers a Lift

By JON E. HILSENRATH
Staff Reporter of THE WALL STREET JOURNAL

NEW YORK -- Could it be that when the going gets tough, the tough turn to candy?

According to a University of Michigan survey, customer satisfaction with chocolate products rose during the third quarter, while satisfaction with many other consumer products dropped.

Michigan's American Customer Satisfaction Index, scheduled for release Monday, slipped to 72.0 from 72.1 for the second quarter, its fourth consecutive decline after a relatively steady march upward since early 1997. More notable than the size of the decline for the third quarter was the breadth of the weakness. Of the 44 consumer-product names measured by the University of Michigan in the latest survey, 35 companies saw their customer-satisfaction score remain unchanged or decline.

Each quarter, the University of Michigan surveys a different sector of the economy, asking consumers about their satisfaction and loyalty to different brands. Previous surveys have measured durable goods, services and retail trade. The latest quarterly survey focused on companies that produce nondurable consumer staples, ranging from beer to sneakers to pet food. H.J. Heinz Co., the Pittsburgh food company, was the highest-scoring company measured in the survey, even though its score edged lower to 89 from 90 a year ago. Many other high-profile companies in the latest survey saw their satisfaction scores fall more markedly than Heinz. Reebok International Ltd.'s score fell 6.4% to 73. Nike Inc.'s score fell 5.1% to 74, Coca-Cola Co.'s score dropped 5.8% to 81 and Adolph Coors Co. dropped 4.9% to 78. Like Heinz, these scores still tended to be higher than those in other sectors, such as technology and automobiles.

But there was good news for candy makers Hershey Foods Corp. and Mars Inc., which saw their satisfaction scores rise. How to explain this distinction? Claus Fornell, a University of Michigan professor who heads the survey project, said the outsized gains might be indirectly related to economic turmoil. During turbulent economic times, people like to indulge themselves with inexpensive pleasures, like chocolate, he said.

A similar survey conducted by Mr. Fornell in Sweden during a recession in the late 1980s found that satisfaction with chocolate companies was high. Mr. Fornell may be on to something. In the U.S., consumption of confections and gum rose 7% to 21.5 pounds a person annually from 1990 to 1992, a period that included the previous recession, according to David Kerans of Argus Research. After continuing to rise through much of the 1990s, candy consumption fell from 1997 through 1999, when the economy was booming. By 1999, the average American consumed about 26 pounds of candy a year, Mr. Kerans says; that amounts to about five Hershey chocolate bars a week.

"It is a simple pleasure at a time when we need more pleasure in our lives," says John McMillin, an analyst with Prudential Securities. Hershey's share price is up 11% from a year ago. Mr. McMillin also notes that Hershey's sales were up 1.5% for the first nine months of the year from the year-earlier period, not counting sales from the acquisition of a unit of Nabisco Inc. Sales for the overall packaged-foods industry for the same period were flat. Spokeswomen for Hershey and Mars said their companies hadn't conducted any internal studies to test the economic hypothesis, but they added that chocolate sales are holding up well.

Consumers seemed unexcited about most other consumer nondurables. Soft-drink companies made an especially bad showing. The ratings for the category, which still are relatively high at an overall 82, fell from 86 a year ago. Coca-Cola saw the biggest decline, with its score falling to 81 from 86. PepsiCo Inc.s rating declined much more modestly, to 84 from 85.

A spokesman for Coke warned about reading too much into individual-company ratings, because surveys for individual companies rely on a relatively small sample size of about 250 individuals. The smaller the sample size, the more volatility one can expect in its readings.

"Our continuous consumer-tracking research, which monitors thousands of consumers, shows no significant change in the preference of consumers who say they drink our brands most often," Coke spokesman Bill Marks says.

However, a study by market-research and consulting firm Cannondale Associates showed some trends similar to the Michigan survey. In the Cannondale report, PepsiCo gained on Coke in measures ranging from consumer brands to sales organization to marketing effectiveness. "Pepsi has been better able to foster new brand innovation which satisfies consumer preference," says Andrew Conway, a beverage analyst for Credit Suisse First Boston. Mr. Conway pointed to introductions of products such as Code Red, a cherry-flavored drink, and the Aquafina water brand as examples of successful product launches. Meanwhile, Coke has been buffeted by a series of management changes and has been slow to roll out major marketing programs, Mr. Conway said.

Consumers also gave lower scores to athletic-shoe companies. Mr. Fornell said Nike and Reebok appear to be suffering from spending large portions of their ad budgets on endorsement contracts with sports stars to attract new customers and not enough on customer-retention efforts. Reebok's customer-retention reading dropped 7% from a year ago and Nike's dropped 4%, according to the University of Michigan. A spokeswoman for Reebok said the drop was more likely associated with the trend of consumers switching to casual shoes from sneakers, which she said might be dissipating. Officials from Nike weren't available for comment.

According to Mr. Fornell's theory, declining overall satisfaction translates to slower consumer spending in the economy. Because consumer spending represents about two-thirds of all economic activity, Mr. Fornell has long argued that the ACSI could be viewed as a leading economic indicator. But during times of economic uncertainty, such as now, Mr. Fornell concedes that satisfaction levels may play a less important role in determining consumer spending than will more pressing issues such as employment and income.

"As the economy now contracts, the relationship between ACSI and consumer spending may become weaker," Mr. Fornell said.

To create the American Customer Satisfaction Index, the National Quality Research Center at the University of Michigan in partnership with the American Society for Quality and the CFI Group of Ann Arbor, Mich., conduct telephone surveys with 12,500 customers of the companies being surveyed that quarter.

Each year, that amounts to about 65,000 customers of products from about 190 companies and 70 government agencies. Sales of the measured companies constitute 30% to 40% of the U.S. gross domestic product.

Companies are scored on a scale of 0 to 100. Industry indexes are constructed with company indexes, weighted by the sales of each company. The national index is made up of the industry indexes, weighted by their contribution to GDP.

Different sectors are updated each quarter, so the entire index is fully updated each year. Customers are quizzed about their expectations and their perceptions of value and quality in the services they have purchased; for manufactured goods, quality is broken down into measures of the product and the service accompanying the product. These are translated through computer models into overall customer-satisfaction scores, which are used to predict customer loyalty.

Write to Jon E. Hilsenrath at jon.hilsenrath@wsj.com

ACSI Over Time

National ACSI = 72.0 (down from 72.1 in Q2)

*Revised 11/01

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