Sizing Up the College Market

According to the College Board, the cost of tuition at a 4-year public university doubled between 1980 and 2006. The pace of increase is accelerating with a 35% increase in the past 5 years alone. (Source: Economic State of Young America). According to the National Retail Federation, college students are expected to spend about $10.5 Billion gearing up for and attending college this year. But tuition is only a fraction of the story. According to a very cool graphic assembled this spring by Westwood College, just 19% of college student spending goes to tuition. Another 26% goes to to room and board. Where does the rest of the money go? Most goes to consumer goods and services – travel, apparel, textbooks, entertainment and ‘discretionary’. The National Association of College Stores says students spend about $750 in their college store, only $488 of which goes to textbooks and course materials.

However you size it, college, and preparing for college is big business. Department stores like JC Penney and Bed Bath and Beyond each have specific college directed efforts and there are dozens of web businesses like collegepad.com that would love to outfit your dorm. The College Board even offers a handy checklist to make sure you don’t forget the band-aids and Neosporin, much less a bottle opener or DVD player.

It's possible 2009 will see the peak for college spending. Not only has the recession put pressure on decisions about where students apply and attend, it may also alter how they go to school. According to Engage Gen Y, educators, parents and students are taking a hard look at these alternatives to expensive textbooks.

Chegg: Allows students to rent their book for class at a discount of more that 50% and have it delivered to their door. Chegg plants a tree for every book rented.

CourseSmart: Offers digital versions of traditional textbooks from some of the major publishers in the industry.

Textbook Media : Textbooks and study guides provided online through a web-based book reader, offered free to students through sponsorships from national brands.

Flat World Knowledge : An open-source textbook provider that provides online textbooks in a reader to students free of charge. Students pay for premium services.

Beyond text books, as online education becomes more mainstream, the ‘college experience’ itself, as least as I knew it with four years at college living on campus, may become the premium or luxury option, not the default. This summer, my son is taking an online high school ‘health’ course for credit from BYU.edu. If he likes it, it may shape how he thinks about college. And according to Time (July 29, 2009, "Can Community Colleges Save the U.S. Economy?"), community colleges are enjoying record enrollment surges from laid off workers and students looking to save on room and board.

Will Millennials Stop Spending?

In a word, no. Or let me modify that, I don't think so. Millennials, like everyone, are feeling the pinch of a shrinking economy and collapsing financial markets. Yet there are indications Millennials may not be pulling back to the same degree as everyone else. Individually, none of these indications would be definitive. Together, they suggest Millennials will keep spending:

Our focus group research last week suggests they are still interested in imported beer.

An Ad Age-commissioned survey (1.19.09) shows younger coffee drinkers are the least likely to report they are cutting back on expensive lattes. "Those who have scaled back the most since the beginning of the year...are consumers 45 to 54, with fully half (50.4%) saying they have "cut back a lot" on fancy or expensive takeout coffee. That was followed by consumers 35 to 44 (37.5%) and 25 to 34 (33.3%)."

This week BIGresearch predicted Millennial-favorite retailers Aeropostale, Hot Topic and Buckle "are almost certain to see an increase" in sales in 2009, based on indications from their survey panel. (Wal-mart and Fred's were the only other retailers in this category.)

What's going on? My guess is that Millennials are already accustomed to thinking of themselves as cash strapped, so the crisis is unlikely to bring any real change in behavior. Every college student I know is convinced he is 'poor'. Recent grads feel burdened by (very real) college debt and young marrieds/parents are chronically short of cash. This is good news for Millennial marketers who have long understood that 'luxury' is not a word designed to appeal to the Millennial mindset. Millennials always think of themselves as 'value' shoppers, even as they opt for expensive brand-name apparel and electronics. Apple will continue to thrive, despite the fact that a $649 Dell provides the same functionality as a MacBook at twice the price.

Judy Hopelain, describes in her blog, Retail Hits and Misses, her experience shopping for a formal dress with her 16-year old daughter. I think it perfectly captures the Millennial mindset, spend carefully, but spend!

There were deals to be had. We started out at Bloomingdale’s and after trying on a dozen or so dresses, found one by French Connection she loved but was a size too small, and had them hold 3 others while we went to look elsewhere. She was concerned that someone else would show up in the BCBG dress she put on hold. A group of 15 girls all agreed to post pictures of their dresses on Facebook to prevent duplicates (GREAT IDEA!), but the whole school is not part of the plan, so she couldn’t be sure. BCBG seems to be the favorite of high school juniors and seniors, and apparently two girls wore the same BCBG dress last year. The horror! So, we worked our way through the mall. The favorite dress on hold at Bloomies was on sale at the BCBG boutique for 30% off – and the store was filled with girls from our high school. So, despite the discount, which put the dress closer to the price I had in mind, the dress was off the list. The whole brand was out. We ended up finding a totally unique dress in a London boutique called Reiss – no way would anyone else have that dress. It was marked down 75%, which put the dress comfortably in our price range. So, we bought it, and a great looking pair of sandals to go with. Later, at home she went online and found her size in one of the dresses she’d tried on at Bloomingdale’s that was a size too small at LolaBoutique.com. What to do? Like lots of people, we are cutting back and watching our spending. She came up with the plan – return the sandals since she realized she already had shoes to go with either dress. Return the dress to Reiss. And since the dress online was still slightly over the price I had in mind, have her pay the difference. Oh, and let her run around and handle the returns herself.

What Millennials Will Be Talking About at Thanksgiving

Millennials across the country will be returning home for Thanksgiving. What will they be talking about other than the pie? I strongly suspect the economic crisis will be at the top of the list. For those in college, there will be some anxious discussion of whether it will be possible to stay there. For those out of college, jobs will be top of mind. We just completed a series of focus groups among Notre Dame students and recent alumni about their lives post-graduation. While they are overall optimistic about their future, they have immediate worries about getting a job, keeping a job, or changing jobs, depending on where they are in their career. They yearn to be independent, and want the freedom to make good choices based on what they really want to do, not ones dictated by a poor economy. Many are struggling to pay back loans.

Jessica: "My loan payment is about a quarter of my income each month, it's constantly hanging over my head."

Gwen: "I worry that I'll never go back to school and I want to."

Laura P. "More generally, my biggest worry the economy and job stuff. I feel okay about our mortgage and student loans as long as our jobs remain stable."

Chad: "If I didn't do what I do, i wouldn't be able to pay my debt. And I hate that fact."

Traditional Thanksgiving conversations about 'What would you like for Christmas?' will give way to 'How can we moderate our Christmas spending and still make it feel like Christmas?' Millennials tell us they are finding small ways to save -- eating out less often, forgoing a cell phone upgrade, drinking fewer lattes, taking fewer trips. One Millennial I know has given up his car in favor of Zipcars. But they are still having trouble making ends meet. A study from the American Savings Education Council (ASEC) and AARP shows that 91% of young adults report having financial goals for themselves, only 53% report sticking to a monthly budget. 61% feel their retirement savings is behind schedule. 42% of these young adults give themselves a grade of D or F to describe how well they are saving. Cash in a stocking is likely to be a common request.

Millennial Spirits: Make Mine Sophisticated

My Millennial friends tell me they are more likely these days to open a bottle of wine with friends than a six pack of beer. The data suggests they are right on trend. Overall, sales gains for wine and spirits are outpacing beer. And within the beer category, growth in imports and microbrews is outpacing regular beer. This trend, like so many, appears to reflect a growing sophistication in the tastes of young drinkers.

In June, Mintel released two new reports, one on drinking at home and another on drinking away from home. Both reports show similar trends by age: young people are increasingly opting for wine and vodka over beer. 32% of 21-25 year olds say they are 'drinking more liquor/spirits than last year'. The average number of microbrewed beers drunk by 21-24 year old microbrew drinkers increased from 3.0 in 2005 to 3.8 in 2007. And a full 38% of 21-24 year old drinkers say vodka is their top spirits choice in a restaurant or bar.

Diageo, a close watcher of Millennial trends, is among the first to really capitalize on the sophisticated appeal of vodka. Today, a new campaign is breaking for their new ultra premium vodka, Ciroq. Here's what Mediapost says about the new campaign, called "The Art of Celebration" featuring Sean "Diddy" Combs:

"Shot in black and white at one of Sinatra's former California homes, the 15- and 30-second commercials depict Combs as a high-spirited host amidst a chic crowd during an impromptu private house party. Combs is serving Cîroc, one of the world's only vodkas made from grapes, while engaging with his modern-day "Rat Pack" entourage. Sinatra, along with Dean Martin, Peter Lawford, Joey Bishop and Sammy Davis Jr., were the original packers. In the spots, Combs mingles, dances and jokes during the intimate party, before finally stealing a private moment to gaze into the night as the crowd enjoys a fun-filled evening inside. The spot represents a continuation of the brand's commitment to defining "sophisticated celebration"--a concept Combs embodies and cultivates both personally and professionally as a lifestyle and entertainment icon. During the holiday season, the campaign will evolve to focus on safety."

The combination of high style, celebrity and music is likely to appeal to Millennials, who are most likely less interested in 'luxury' than in what wine Fat Bastard calls 'Livin' Large'. As we have noted before, Millennials do not think of themselves as well-off, despite their relatively high disposable incomes. They do, however, see themselves as discerning consumers who value authenticity and quality. This campaign seems to hit the mark in both respects.

Where Do Millennials Shop for Fashion?

Of all the scary financial news in the past few weeks, the scariest for marketers are the dire 4th quarter retail sales predictions. Yesterday the WSJ ran an article, "Neiman Marcus Sees Bleak Holiday: Luxury-goods Retailer Reports a Doubling of Its Quarterly Loss and Warns the Wealthy Are Cutting Back". If that's not scary, I don't know what is, especially since, until recently, luxury goods were retailing's bright spot. Only last week (9.15.08) the WSJ had a story titled "Fashion in a Faltering Economy". Here's an excerpt I found especially amusing:

Neiman Marcus fashion director Ken Downing praised the edgy "'80s moment" he saw on several runways, a trend long absent from stores and one he felt would look fresh to shoppers. At Bloomingdale's, fashion director Stephanie Solomon expected "rich hippie" looks to appeal in spring.

Excuse, me? I don't recall the 80's ever having an "edgy moment"; "rich hippie" sounds like an oxymoron if there ever was one; but I digress.

With all the doom and gloom, it may be interesting to see what is known about Millennial's fashion shopping habits. First of all, they don't shop in department stores, for a score of reasons, among the most prominent being that is where their moms shop. Millennials much prefer smaller, more boutique like shopping venues, even if they happen to be chains that act like boutiques such as Abercrombie, American Eagle, or Limited. The photo above shows my friend, Melissa and one of her friends having a birthday shopping spree on Melrose, far from Nordstroms, Macy's and JC Penney. According to BIGresearch, Melissa is pretty typical: 31% of 18-24 year olds say they shop most often for clothing at a specialty retailer, compared to just 16% of those 25 and older. This month, Fortune picked 3 specialty apparel retailers as their 'five retail winners':

American Apparel: The Los Angeles based apparel chain sells basics with a twist: Its advertisements tout both the company's high quality, hipster-friendly tees and its fair-wage policies. Such meticulous branding has not only distinguished the retailer from Wal-Mart, but has also enabled American Apparel to boost profits 42% this quarter to $6.8 million and same-store sales by 23%.

American Outfitters: Urban Outfitters, which also owns clothing retailers Anthropologie and Free People, increased revenues by 30% this quarter to $454 million and boosted same-store sales by 13%.

Aeropostale: Aéropostale reported a 43% increase in profits in 2Q, and an overall sales increase of 21%, to $377.1 million. Even more shockingly, the New York based chain saw same-store sale growth of 13% this July, compared with a decrease of 12% in July of last year.

Not all specialty retailers are doing as well as these three; Abercrombie & Fitch and Urban Outfitters have both suffered small losses, which Fortune speculates as having to do with higher prices/lower value.

When Millennials do venture into the world of mass merchandising, Target is far and away their favorite. We have discussed the reasons for Target's status as Millennial darling in previous blog posts, so won't rehash here, other than to point out that BIGresearch data provides confirmation: twice as many 18-24 year olds say they shop Target most often for clothes than those 25 or older.

Macy's is thinking of revamping its famous Cellar of housewares in its flagship Manhattan store to appeal to younger shoppers: "By giving teens a separate entrance and their own place to hang out - similar to creating a rec room in the basement - Macy's is hoping kids will feel less self conscious about shopping where their parents shop." (Fortune, 9.24.08, "Macy's searches for the fountain of youth"). This might work, if like Target, American Apparel and Urban Outfitters, they emphasize value as well as ambiance. Millennials have money but they don't think of themselves as affluent. Sniffing out the bargains AND the fashion is more than half the fun.

Millennials: The Wealthiest Americans?

I am losing patience with the pronouncements that this is the first generation that expects to be downwardly mobile. The reality is that 18-24 year olds are among the wealthiest people in America. Just don't tell them that, they won't believe it.

According to the Bureau of Labor Statistics, 87.4.3% of 18-24 year old males had wages and salary in 2005. In 2006, households headed by persons 18-24 had earnings before taxes of nearly $29,057, up from just $20,120 in 2003 and up 7.5% 2005-2006 alone. For comparison, U.S. income grew just 1.1% in the same period. What makes these figures even more astonishing is that 18-24 year olds by and large do not have families to support. 43% of 18-24 year olds are college students (National Center for Education Statistics). Less than 10% of 18-24 year old males are married. 50% of 18-24 year men live with their parents, 33% of women live with the parents.

If you think starting salaries are down, you'd be wrong. According to Businessweek (5.19.08), the expected starting salaries of new MBA's exceeds $85K, up steadily every year but one since 2002. Starting salaries offered to undergrad business administration majors increased 7.5% 2006 to 2007. So why the angst? Why do most 18-24 year olds consider themselves poor now and their prospects even poorer?

My personal theory is that Millennials have a different idea of what constitutes a 'necessity' and what constitutes a 'luxury'. My college students consider themselves 'poor', yet nearly all sport ipods with thousands of songs, the latest laptops, expensive footwear, cell phones with $100+ plans. The data bears this out. According to the BLS, 18-24 year olds spend a disproportionate amount of money on virtually every category of spending other than food and housing (see table). Within these categories,they have luxury tastes. For example, Millennials are almost twice as likely as older consumers to purchase imported beers and almost three times as likely to pick up a craft beer.

Marketers are on to this insight, even if the Millennials themselves are not. 18-24 year olds represent a vast market for 'luxury' goods --- we just don't call them luxuries.