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Consumer Credit, Generation Z, and the Consumer Packaged Goods Sector

August 31, 2023


Nothing is more central to the consumer packaged goods (CPG) sector than supply and demand — and few things affect supply and demand like economic trends. During the pandemic, when going out in public worried many consumers, savings increased and buying patterns changed. For example, spending on clothing and cosmetics dropped while spending on home goods and staples rose. That pattern was broken when the economy opened up and consumers, eager to once again engage socially, started dressing up and going out. During this period of changing consumer behavior, retailers experienced an inventory mismatch and inflation reared its ugly head. Fortunately, the deep recession that many economists predicted didn’t emerge. Most economists credit strong consumer spending for this soft landing. However, another type of “consumer credit” is beginning to raise concerns. Economics reporter Ann Saphir explains, “Americans borrowed more than ever on their credit cards in the [second quarter of 2023], with balances surpassing $1 trillion for the first time even as overall household debt loads were largely unchanged. Credit card balances rose by $45 billion to $1.03 trillion in the second quarter, … reflecting robust consumer spending as well as higher prices due to inflation.”[1]


Analysts from the Federal Reserve Bank of New York note that this was the first time in history that U.S. credit card debt surpassed $1 trillion.[2] They also noted, “After a sharp contraction in the first year of the pandemic, credit card balances have seen seven quarters of year-over-year growth. … Credit cards are the most prevalent form of household debt and continue to become even more widespread. Consider that there are 70 million more credit card accounts open now than there were in 2019, before the pandemic.”


Should the CPG Sector Be Worried?


With this historic rise in consumer debt, journalist Telis Demos asks, “Is it time to worry about consumer debt?”[3] He adds, “One of the biggest debates in the market today is over what exactly is going to happen with consumer credit. Delinquencies on various kinds of debt are rising, but the rate at which people are falling into outright distress remains low. How long can that continue?” Demos notes that one measure of financial “distress” is delinquent payments. He reports, however, “Until very recently, the rate of late payments had trended below historical norms across virtually all lending types and consumer groups. A frequent explanation is that Americans built up a cushion of extra cash savings during the pandemic and still haven’t spent it down. The good news is this looks to still be the case. According to anonymized and aggregated account data tracked by the Bank of America Institute, the median savings and checking balances were at least 30% higher in July than they averaged in 2019. Notably, balances are highest on a relative basis among households with lower income levels.” In addition, the New York Federal Reserve reports “the overall consumer is healthy, with an average credit score of 702.”[4]


Before becoming too sanguine about the economy, Demos notes, “The frequency with which people are becoming late with payments on their debts for some kinds of loans is returning not just to pre-pandemic levels, but even moving beyond them. The percentage of credit-card and auto-loan balances transitioning into delinquency — that is, going from current to becoming 30-days-plus late — is happening at a pace faster than that of 2019, according to the Federal Reserve Bank of New York.” Add to that the fact that many younger consumers face the added financial burden of restarting student loan payments and the economic outlook becomes a bit murkier.[5] The bellwether group to watch is Generation Z. Journalist Nora Colomer reports, “Credit card balances grew the fastest among Gen Z cardholders in the second quarter of 2023, according to a recent TransUnion survey. Gen Z’s balances increased 51.9% to $55 billion, representing 5.7% of all balances. This uptick in card balances is expected to drive an increase in refinances, especially among Gen Z consumers, the survey said. Fifty percent of this generational group said they planned to apply for new credit or refinance existing credit, compared to 32% for the entire population, within the following year.”[6]


Why is Generation Z so important to the CPG sector? McKinsey & Company analysts explain, “Like every generation, Gen Z’s behaviors are shaped by how they grew up. Young people today have come of age in the shadow of climate doom, pandemic lockdowns, and fears of economic collapse. The first Gen Zers were born when the internet had just achieved widespread use. They’re called ‘digital natives’ — the first generation to grow up with the internet as a part of daily life. The generation spans a wide range: the oldest Gen Zers have jobs and mortgages, while the youngest are still preteens. Globally, Gen Z is growing fast: Gen Zers will make up a quarter of the population of the Asia–Pacific region by 2025.”[7]


What Do Gen Zers Want?


According to the McKinsey analysts, “The internet has changed retail forever and shaped the tastes of digital natives.” Those preferences and tastes must be addressed if the CPG sector hopes to attract Gen Zer’s important business. The McKinsey analysts explain five ways Generation Z is different from other groups:


• Ownership is not as important for Generation Z. For members of Generation Z, the McKinsey analysts insist, “Consumption is about access rather than ownership — Gen Zers subscribe to streaming platforms instead of buying films or music. This trend extends even to services like car shares or luxury-clothing rentals.” It also means that many of their purchases will be made through social channels.


• Experiences matter. McKinsey analysts report, “Gen Zers accept their tastes might change, and they are more likely to spend on experiences that enrich their day-to-day lives than millennials, who are more likely to splurge on luxury.” As noted below, Gen Zers like shopping in person, which means in-store experiences are vital to attract their business.


• Convenience is a must. According to McKinsey analysts, “Members of this generation care about ease of use: mobile pay, app-based services, and simple online transactions are important, and brands have found major success by restructuring to suit Gen Z tastes.” This means retailers need to concentrate on customer service as well as customer experience.


• Generation Z is attracted to brick-and-mortar shopping. “Gen Zers like brick-and-mortar stores more than millennials do,” according to the McKinsey analysts, “but [they] still want a great online shopping experience. Some brands have even found success through online-first launches, often supported by Gen Z consumers.” This means the CPG sector needs to master omnichannel operations.


• Beware of information overload. Because Gen Zers are digital natives, the McKinsey analysts note, “Ads are everywhere; Gen Zers experience brands ‘at every moment’ as they move through their digital and physical worlds.” This means ads must be both targeted and relevant if Gen Zers are going to pay attention.


Concluding Thoughts


McKinsey analysts conclude, “As a generation committed to its values, Gen Z expects the same of its retailers — Gen Zers often choose brands that have a strong story or purpose, as well as those committed to green practices. In one McKinsey study, 73 percent of Gen Z reported trying to purchase from companies they consider ethical, and nine out of ten believe that companies have a responsibility to address environmental and social issues. However, they can tell when a brand is just paying lip service and isn’t backing up diversity or sustainability claims with real change.” In addition, they note, “Many Gen Zers throughout Asia see the internet as the first place to go when researching new products to purchase; in the United States, 40 percent of Gen Zers admit to being influenced online, often by the brands featured in the videos they watch. Members filter a lot of information, from influencers, family, and friends, to decide where and how they want to spend.”


Since older generations have been paying on their debts for years, they generations are likely to remain more credit worthy than younger generations. That’s why Generation Z is an important group to watch as credit grows and distressed accounts increase. In many ways, Generation Z is the canary in the coal mine for the U.S. and global economy.


[1] Ann Saphir, “US credit card debt tops $1 trillion, overall consumer debt little changed,” Reuters, 8 August 2023.
[2] Andrew Haughwout, Donghoon Lee, Daniel Mangrum, Joelle Scally, and Wilbert van der Klaauw, “Credit Card Markets Head Back to Normal after Pandemic Pause,” Liberty Street Economics, 8 August 2023.
[3] Telis Demos, “Is It Time to Worry About Consumer Debt? What Is Going On in Seven Charts,” The Wall Street Journal, 16 August 2023.
[4] Nora Colomer, “Recession may be off the table as economy moves toward ‘soft landing’: VantageScore.” Fox Business, 17 August 2023.
[5] Kanika Talwar, “Federal Student Loans Impact Gen Z’s Financial Stability,” Women’s Wear Daily, 23 August 2023.
[6] Colomer, op. cit.
[7] Staff, “What is Gen Z?” McKinsey & Company, 20 March 2023.

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