With the nation seemingly emerging from recession, American consumers remain skittish about spending their money during this upcoming holiday season according to new research from The Nielsen Company.  Households continue to focus on “essential gift giving” such as staple consumables, candy, beverage/alcohol and entertaining at home, and 86 percent said that they expect to spend the same or less this year than last — with a 7 percent increase in those indicating they would spend less.  Overall, Nielsen is projecting that holiday sales will rise 0.03 percent this year, accounting for $90 billion in dollar sales.

“Given everything the consumer has absorbed over the past 12 to 18 months, the fact that we expect this coming holiday season to be flat in dollars can be viewed as a modest positive,” said James Russo, Vice President, Global Consumer Insights at The Nielsen Company. “Americans have undergone a fundamental change in how they spend their money, and the days of stretching finances to make purchases not deemed as necessary are over, at least for the time being.  That said, our research has shown that consumers are looking forward to loosening their purse strings a bit, but only once they feel more confident about the state of the economy and their personal financial situation.”

Update: James Russo Discusses Holiday Spending on CNBC

Other key findings from the research include:

• Traditional items such as apparel, toys and technology will be most popular categories, albeit at restrained levels and primarily sold in “value” channels.
• Products aligned with at-home entertainment such as cookware, kitchen items, bed and bath accessories and alcoholic beverages will do well.
• Gift cards are one category where consumers plan to spend more this holiday season, followed by toys and apparel.
• Value retailers such as dollar stores, online, discounters and club stores will attract the lion’s share of holiday spending as consumers minimize trips and search for the best values, while office supply, pet stores, home improvement and drug retailers are likely to feel the brunt of the economic slowdown.
• Some 20 percent of households said that they had no plans whatsoever to entertain at home or away from home during the holidays.
• Spending cut-backs are being driven by all income groups.

So how can retailers make the most of this season? They need to recognize that U.S. consumers are, first and foremost, seeking value and will start their holiday shopping well before Thanksgiving.  They should also reach out to their best customers and make them feel special and give them a reason to shop at their outlet during the season and into 2010.   Successful retailing has always been about delivering the right product at the right price and in the right place.  The difference now is effectively mining and communicating to the right consumer as an active participant in driving growth.

SUMMARY: Santa’s not the only who made a list and checked it twice. Consumers patiently waited for the best possible bargains this past holiday season, even delaying purchases until the New Year in hopes of additional savings. In-home entertainment options along with the affordable luxury of going to a movie were big winners.

Nielsen analysts proved prophetic with a U.S. October holiday forecast that called for a holiday dollar sales gain of 4.4% or $98 billion across grocery stores, drug stores, mass merchandisers and convenience stores. The final numbers proved forecasts to be nearly on target—within 1.4% of actual results—for all channel dollar values ($99.5 actual vs. forecasted $98.2 billion). Unit sales, while on par with the -0.5% predicted decline, actually fared better than expected—increasing 34% year-over-year with total volume levels reaching 36.6 billion versus the forecasted 36.3 billion. The slightly lower predictions reflect a conservative set of economic assumptions, and an even more pronounced rise in commodity prices than anticipated, which bounced pricing up and units down.

The categories that drove the highest sales spikes during the 2008 holiday season were as predicted—chock full of gift-giving items and holiday baking confections. Musical instruments and accessories topped the list with more than half (52%) of the purchases for the year made in the eight weeks ending December 2008: women’s and children’s fragrances, baking supplies/ingredients and computer electronics products were also perennial holiday favorites.

Home devices

Consumers looking to reduce expenditures sought entertainment closer to home in 2008, logging more hours in front of the TV, gaming device or DVD player. In fact, 10% of all homes purchased new home entertainment equipment during the 2008 holiday season versus 9% last year. Televisions accounted for more than one-third (35%) of all new home entertainment equipment purchases, with almost two-thirds of those sets comprising high definition units (64%). Digital converter boxes for analog TVs represented 9% of equipment sales.

Video game consoles added up to 18% of entertainment equipment purchases, with DVD players contributing an additional 11% of sales. VCR sales fell off the sales map with a less than 2% acquisition rate. Altogether, the four most popular devices (TV, digital converter boxes, video game consoles, DVD players) racked up nearly 75% of all equipment purchases.

Video views

DVD sales nosedived during the last eight weeks of 2008, falling some 14% over prior year results. Standard definition DVD sales plummeted by 18%, negatively impacting category performance despite the 255% increase in high definition Blu-ray disc sales. All DVD genres, with the exception of fitness, lost ground when compared with the same period in 2007.

Sales of new DVD releases were down by 23%, TV-on-DVD dropped 21%, theatrical releases plunged 14% and catalog sales edged down by 7%. The top 10 titles still account for roughly one in five DVD sales.

Game time

Just like football, it’s the fourth quarter that counts in the gaming field. That’s when the blockbuster gaming titles like Gears of War 2, Dead Space, Fable II, Guitar Hero: World Tour and Fallout 3 got released, in anticipation of the holiday shopping cycle. Males played roughly twice as many days per month during the November/December 2008 holiday season as females on the Xbox 360 console, with a much narrower disparity between genders in usage days on the Wii and Playstation 3.

Wii is successfully broadening the gaming market to get at newer gaming audiences beyond the hardcore 18–24-age segment. For females, the heaviest usage comes from the 25–34-age range and for males, the console skews younger with the largest percent of use coming from 6–11 year olds. PS3 users skew older than the typical gaming demographic, perhaps attributable to gamers who ‘grew up’ with Playstation, the oldest of available consoles, or the cost, which might ‘price out’ younger buyers.

Musical notes

The music industry recorded mixed results for 2008. While overall music sales for albums, singles, music videos and digital tracks rose by 10.5% in 2008 on a year-to-year basis per Nielsen, total album sales including CD, CS, LP and digital albums were down 14%. And holiday season (11/17/08–12/28/08) sales dropped further to -19%.

Offsetting the downturn was a 27% jump in digital track sales and a 32% spike in digital album sales for the year. Holiday digital album sales gave reason to celebrate, climbing 37% to 9.9 million units sold during the holiday season. When it comes to holiday song preferences, the classics still dominate with Rockin’ Around the Christmas Tree by Brenda Lee retaining its number one position, followed by the Burl Ives song, A Holly Jolly Christmas, and Nat King Cole’s rendition of The Christmas Song in third place.

Movie magic

Pundits often refer to the movie business as recession-proof. That sentiment proved true once again in 2008, with box office receipts climbing 11% to $1.655 billion during the November/December holiday season. Holiday favorite titles during the 2008 season included Madagascar: Escape 2 Africa, Twilight, Quantum of Solace, Four Christmases and Bolt.

Book marks

Books are a perennial favorite idea for a last-minute stocking stuffer, with Christmas week registering the only year-over-year sales increase for adult non-fiction (up 25%) and fiction (up 14%) book sales. Children’s books remain a favorite purchase, with sales increases for each of the last eight weeks of the year. Popular titles included Outliers by Malcolm Gladwell, A Mercy by Toni Morrison, and The Tales of Beedle the Bard by Harry Potter series author J.K. Rowling.

Black was back—for online

Black Friday—the day after Thanksgiving, often thought to portend the state of the holiday shopping season—delivered black ink and solid bottom lines for online retailers. Nielsen measured a 10% increase in Black Friday web traffic over the prior year, with 31.7 million unique visitors clicking on more than 120 representative retailer web sites.

Consumer electronics plugged into consumer interest, posting a 219% increase in unique audience numbers over 2007. Other categories making a strong online showing included shopping comparison portals (traffic up 83%), toys and videogames (up 73%), home and garden (up 53%) and computer hardware/software (30%).

Big winners

Analysis of online discussion forums and blogs by Nielsen revealed that consumer thinking about Black Friday centered on incentive-linked language such as ‘deals’, ’sales’ and ‘doorbusters’. Fully 81% of online holiday shoppers read online customer product or retailer reviews, saying the write-ups made them more comfortable with purchase decisions.

Retailers who responded to the desire for discounts reigned, with eBay, Amazon, Walmart Stores, Target and Best Buy topping the list. In an anomaly, Circuit City posted an extraordinary 352% spike in traffic, likely associated with one-of-a-kind store closing discounts on merchandise.

Cyber Monday kicked off the first full holiday shopping week with an equally strong showing, logging a 10% increase in web traffic to the Holiday eShopping Index over 2007 results. The beauty category recorded an attractive 151% rise in unique audience growth, followed by toys and videogames with a 112% increase and apparel, up 58%.

Ad vantage

Product reviews are one mechanism for attracting buyers. Advertising is another. Nielsen measured the reaction of 20,000 viewers to retailer holiday ads from November 17 to December 14 and determined that the most appealing spots either told a story, tapped into emotions, focused on the kids and family or delivered a practical message, though not necessarily a price-based one.

Walmart’s ‘register lights on’ commercial was the most-likeable retail ad; with an index of 171 (a score of 100 is average for a retail commercial during the period). Macy’s ads nabbed the second and third most-likeable spots, with a nostalgia ad scoring 155 and celebrity readings of ‘Yes, Virginia, there is a Santa Claus’ rating 154.

Holiday cheer
All in all, marketers who remained sensitive to consumer sentiment, delivering either a substantive value or comprehensive experience, fared well during the holidays. Consumers were willing to spend money in categories that delivered on the product promise, satisfying a deep-seated consumer need or want at a fair market price. Moving forward into 2009, this is a lesson well-learned to remain competitive as the economy continues its downward spiral.

Overall in November, trips to retailers declined by 2.9% from the previous year.

Retail Channel Trends
Toy stores, electronics stores, and department stores saw the most dramatic declines in the number of shopping trips last month vs. a year ago.  Trips to toy stores dropped by 23%, trips to electronics stores were down by 21%, and trips to department stores fell by 17%, Nielsen reported.

Retail channels offering low prices and strong value fared the best during November.  Trips to dollar stores (+6%), online retailers (+4%), supercenters (+2%), and club stores (+1%) showed the only year-over-year increases in trip growth rates.

Private Label Trends
In October, value-minded consumers increasingly shifted their purchases to private label products, as the U.S. economy weakened.  Unit sales of private label brands grew by 5% in October — up from 2% growth throughout the past year.

Meanwhile, unit sales of branded products showed a mirror opposite trend, with growth declining by 4% in October after showing an overall 2% decline during the 52-week period ending November 1.  As the U.S. economy slipped further in the third quarter and continued to slide in the fourth quarter, unit sales of branded products worsened in every grocery department — except frozen foods.

In terms of dollar sales, private label products maintained steady 10% growth in October – a trend that has remained constant throughout the past year.  Private label alcoholic beverages, fresh and packaged meats, fresh produce, frozen foods, and dry grocery products saw the fastest dollar sales growth in October.

In contrast, overall sales growth for branded products slipped to 2% — down from 3% during the 52-week period ending November 1.  Although still growing, sales of branded dairy, deli, and fresh produce experienced the greatest declines in dollar sales growth.  Sales of general merchandise products dropped markedly in October and during the 13-week period ending November 1.

Given the continued weakening of economic conditions, Nielsen expects this behavior to intensify in December and into 2009.

Nielsen’s Tips For Manufacturers, Marketers, and Retailers
-Exploit new growth areas: consumer appetite for at-home products, basic necessities, and good values will only intensify.

-Don’t assume consumers are not willing to pay a premium: price is important, but delivering a clear value proposition is more critical.

-Protect your turf: manufacturers should work proactively with their retail partners on branded vs. private label shelf-set rationalization.

-Companies that maintain sales and marketing efforts during recessions typically enjoy better post-recession growth: now is the time to utilize advertising to build customer loyalty and differentiate your brand.

Stay tuned on Nielsen Wire for regular updates on U.S. retail trends and other key economic indicators.

By: James Russo, Vice President, Marketing, & Todd Hale, Senior Vice President, Consumer & Shopper Insights, The Nielsen Company

SUMMARY: Color the 2008 holiday shopping season red for investment losses, white for shredded financial documents and blue for American consumers dealing with the double whammy of failed financial markets and crumbling employment numbers. An equal opportunity offender, the market downturn has impacted all economic strata , including the one-third of high net worth individuals dialing down holiday spending.

Usually it’s weather forecasts that put a crimp in holiday shopping plans, but this year retailers fear a financial “perfect storm” may put the wraps on projected sales. The Nielsen 2008 Holiday Outlook Report forecasts a 4.7% increase in dollar sales, but a potential decline of -0.8% in unit sales, with any nominal gain attributable to higher commodity prices.

Amplifying the effect and timing of the financial crunch is the fact that the holiday selling season (defined as Thanksgiving week through December) accounts for as much as 20% of total sales volume in food, drug and mass retailers in the U.S. Many consumers will be doing slightly better than a lump of coal in their stocking, with 50% expecting to maintain 2007 spending levels, while 35% will be trimming back.

As a general trend, the market collapse has had a chilling effect across all income levels. Even high-income individuals earning $100,000 or more a year will be more circumspect, with one-third stating that they will spend less on holiday treats this year.

All is not doom and gloom, however. While these are very hard economic times, there will be growth to manufacturers and retailers who use the economic slowdown to build competitive advantage, differentiation and loyalty. More than ever, the ability to understand consumers at an increasingly granular level will deliver the insights to drive success.

Pricing unplugged
The theme for Christmas 2008 is value, and consumers will be looking to consolidate shopping trips and capitalize on instant rebates, coupons or everyday low pricing. According to Nielsen, the formats making it onto shoppers’ “nice” list are convenience/gas, dollar and grocery stores, supercenters and mass merchandisers. The formats assigned to the “naughty” list include department and electronic stores, where shoppers expect they’ll be spending 28% less than a year ago, opting to purchase electronics at other formats.

Online shopping outlets will be celebrating an uptick, as 12% of shoppers expressed intent to buy more online and an additional 41% will hold Internet spending constant. The appeals of online shopping are many: 24/7 access, no need to travel and burn expensive fuel, quick comparison shopping, gift wrapping and door-to-door delivery.

Limited additions
Caught between a credit crunch and holiday aspirations, U.S. consumers will be carefully parceling out their expected $98 billion holiday spend across 125 categories and a select number of channels: food, Walmart, drug, mass merchandisers and convenience stores. Holiday highlight categories that outperform the 20% share norm include: musical instruments, a variety of fragrances and colognes, cooking ingredients and wares, festive candles, electronics and the all-important batteries to run everything. These products reflect a closer tie-in to necessity gift gifting as opposed to discretionary spending.

Wired in to demand, Walmart is projected to tie up some 55% of computer electronic product sales, 44% of fresh meat and 43% of pet care products, wooing customers away from food, drug, mass and convenience outlets. Grocery stores should retain their traditional lock on categories such as fresh produce and pasta (84%), and in a nod to the party season (or hearty winter stew recipes), wine (84%). Mass merchandisers will open the throttle on baby needs with a 49% share along with housewares and appliances (40%).

Health care (44%) and cosmetic sales (40%) will dress up results in the drug channel. Meanwhile, convenience/gas store sales will be fueled by immediate consumption products like beer (59%) and carbonated beverages (39%).

Online inroads
Online’s value and convenience propositions will make it a must-use channel for holiday shopping. These high hopes are validated by 2007 performance figures. Nielsen research determined that convenience, not price, was the primary driver of holiday online shopping last year, with 81% of respondents citing the “freedom to shop at any time of day” as a primary motivation, followed by saving time (77%), easy comparison shopping (61%) and the ability to find items easily (56%).

Online shopping has become such an accepted channel, that it has literally redefined key metrics. Whereas marketers traditionally used Black Friday (the day after Thanksgiving) as the litmus test to gauge season performance, Cyber Monday is gaining increasing importance as a sales benchmark. Cyber Monday refers to the first Monday back at work, and at the keyboard, after the Thanksgiving holiday.

In 2007, Cyber Monday traffic spiked some 10% over the prior year, with combined home and work traffic reaching 32.5 million unique visitors. The biggest-pulling categories for electronic shoppers included consumer electronics, toys/video games, books/music/videos, apparel, home and garden, computer hard/software, jewelry, flowers and gifts.

Entertaining options
‘Tis the season for DVD sales, which rack up 40% of annual dollars during the fourth quarter. Nielsen reveals that the six week official holiday season contributes nearly 24% of all DVD sales, spurred on by the release of major summer hit movies and retailers using DVD promotions as loss leaders to drive traffic.

Similar seasonality exhibits for book sales, which begin to trend upwards in October and peak the week before Christmas. Roughly 17% of annual book sales occur in the last five weeks of the calendar year. This year should prove to be no exception, with new releases from Eragon author Christopher Paolini, Stephen King and J.K. Rowling.

The gaming industry bets aggressively on strong holiday sales for both consoles and software, and this year has demonstrated remarkable resiliency against the weak economy. Hopes are running high for a record holiday season thanks to impressive performance by Wii, an aggressive $50/unit price reduction on Microsoft’s Arcade model Xbox 360, and new releases for both the PS3 (Little Big Planet, Resistance 2) and Xbox 360 (Gears of War, Fable II) systems.

Deck the aisles
Survival tips for retailers and manufacturers gearing up for the holiday season include the following recommendations:

• Manage inventory like never before to avoid extraneous carrying costs in January;
• Reach out to high-value customers through direct mail or special offers that reward loyalty;
• Merchandise to fulfill consumer necessities; have-to’s versus nice-to’s should dominate the product mix; and
• Leverage interest in basic consumer packaged goods such as toiletries, pet care or special holiday food/beverage packs, positioning them as ideal stocking stuffers.

The strategies put in place now will further enhance growth in 2009 as the economy slows and consumers intensify their existing level of behavior with coping tactics such as trading down on products and services and a re-alignment of value-seeking shopping alternatives.

Declines were especially steep during the last four weeks of the quarter, which saw the collapse of Lehman Brothers, the near-collapse of Merrill Lynch, and the government bailout of AIG.

Traditional mass retailers (excluding supercenters), department stores, and office supply stores saw the most dramatic declines in the number of shopping trips last quarter vs. a year ago.  Trips to mass retailers dropped by 9.1%, trips to department stores were down by 8.9%, and trips to office supply stores fell by 7.9%, Nielsen reported.

Retail channels offering low prices, strong value, and mostly “need to have” products — versus “nice to have” items — fared the best during Q3 2008.  Trips to online retailers (+7.5%), supercenters (+3.6%), and dollar stores (+3%), for instance, showed the largest increases, compared with Q3 2007.

More affluent consumers looking for bargains drove the growth in trips to value retail channels, while lower-income households adopted more drastic cost-cutting measures, eliminating shopping trips entirely, according to Nielsen.

U.S. consumers surveyed by Nielsen in late September and early October also reported having significantly less discretionary income than their global peers. 

Almost 25% of U.S. consumers reported having no spare cash after covering their essential living expenses.  In comparison, just over 10% of consumers worldwide reported a similar lack of expendable income.

U.S. consumers were also more likely than consumers worldwide to use expendable income to pay off debts, Nielsen found.  More than 35% of U.S. consumers reported using their spare cash for debt payments, while only 30% of consumers worldwide reported the same.

In early October, Nielsen’s holiday retail forecast estimated that 85% of U.S. consumers plan to spend the same or less on holiday shopping, versus 2007.

Stay tuned on Nielsen Wire for regular updates on U.S. retail trends, and other key economic indicators.

A recent Nielsen survey of 21,000 U.S. households found that 35% plan to spend less this year than they did in 2007.  Just 6% will spend more this year, while 50% say they’ll maintain the same level of spending from 2007.

Lower-income households reported large reductions in their holiday spending — but so did high income households.  In all, 37% of lower-income households are expected to cut back on holiday spending, as will 34% of higher income households.

What’s Hot?

Necessities — rather than novelties and luxuries — are expected to drive holiday sales this year, according to Nielsen’s research.

Toiletries, baby care products, food items, and gift cards for groceries, gasoline, telephone, and car maintenance are expected to see strong sales.

Practical, cold-weather apparel — socks, fleece jackets, and undergarments — and household goods, like cook books, bed/bath linens, and kitchen supplies are also expected to sell well in November and December. 

Among more affluent consumers, fireplace accessories, kitchen ware, family games, and other at-home entertainments will dominate sales. 

As in past years, DVDs, video games, mobile phones, books, and wines and spirits are also expected to generate a fair share of holiday sales. 

Although many consumers are curtailing their spending on out-of-home food, alcohol, and entertainment, sales of movie tickets, which remain an affordable luxury, are expected to stay strong in November and December.

What’s Not?Department stores and retailers of electronics, toys, home improvement supplies, and office supplies are likely to feel the brunt of the economic slowdown as consumers shift their purchases to more value-oriented retailers.   

Where’s the Action?Online retailers, dollar stores, grocery stores, supercenters, mass merchandisers, and club stores are expected to attract the lion’s share of holiday spending, as consumers seek to minimize the number of shopping trips they make — and find good values.

View in depth Nielsen data on consumer holiday spending projections.

Read Nielsen’s holiday sales forecast.

Go behind the numbers: read NielsenWire’s Q&A with James Russo, co-author of Nielsen’s holiday retail forecast.

Read coverage of Nielsen’s findings in Adweek, Media Post, Promo, and the Rocky Mountain News.

Submit questions about the report to Nielsen forecast co-authors, James Russo and Todd Hale, by commenting below.

Nielsen’s holiday retail forecast predicts a 4.7% gain in dollar sales over 2007.  Unit sales, however, are expected to be virtually flat (-0.8%) versus a year ago.

The forecast includes projected sales at food stores, drug stores, mass merchandisers, and convenience stores, across 125 product categories tracked by Nielsen.

With the economy in turmoil, the 2008 holiday season will be closely watched for indications of declining consumer spending.  Declines in consumer spending were last recorded in the fourth quarter of 1991, during the recession of the early 1990s.

Go behind the numbers: read NielsenWire’s Q&A with James Russo, co-author of Nielsen’s holiday retail forecast.

View in depth data on holiday retail sales projections and consumer spending expectations.

View the full press release.

Read coverage of Nielsen’s findings in Convenience Store News and Adweek.

Submit questions about the report to Nielsen forecast co-authors, James Russo and Todd Hale, by commenting below.