Retailers are coming to terms with a new reality: the consumer who traded down from branded products to private label during the recession and never came back.

Buffeted by high unemployment, heavy debt loads, falling home values and high food and gas prices, these shoppers have been whipped into a permanent state of consumer caution. They buy only what they need, avoid premium labels, clip coupons and scour sales.

Wal-Mart Stores Inc. Chief Executive Mike Duke told analysts in a recent conference call that paycheck-cycle shopping is more pronounced than ever, with shoppers stocking up shortly after getting paid on the 15th and 30th of each month, then moving to smaller product sizes toward the end of the month when they run short of money.

"Consumers are fragile, fatigued and fed up," said Chris Christopher, senior economist at IHS Global Insight, citing wage stagnation, food inflation and high gas prices.

Retailers and manufacturers are figuring out how to appeal to these new "forever frugal" consumers-rather than pin too much hope on economic rebound.

Some are waiting longer to pass on higher costs, whether for food or cotton. Coca-ColaCo. and other companies have added new packages at small sizes and lower price tags.

Some retailers are holding the line on hiring, even as they head into their busiest season of the year. Many stores are expanding their selection of cheaper private-label products and some are offering credit cards with across-the-board discounts. The Depression-era layaway has made a comeback.

Heading into the holidays, retailers are in a bind. Many of them placed their orders back in early spring when the stock market was rising and the economy appeared to still be rebounding. But lackluster back-to-school sales signal that the holidays aren't likely to be free-spending for many shoppers. Now retailers are worried they will have too much merchandise.

Eight of the 16 large retail chains that retail analyst Ed Yruma covers for KeyBanc Capital Markets said their inventories had risen faster than sales when they reported secondquarter profit results in August.

It is an ominous sign indicating that chain stores' profit margins will be squeezed if they have to resort to bigger than planned discounts to move merchandise.

Eoin Treacy's view The aftermath of the credit contraction and the slow pace of economic expansion has squeezed the middle classes. Many have had to lower their monthly outgoings by altering their shopping habits. However, at the other extreme there is an important cohort for whom the current economic climate is nothing more than an inconvenience. Luxury brands continue to report earnings ahead of expectations. This article from Bloomberg highlights the point. Here is a section:

Affluent Americans aged 24 to 49 who have a yen for high living and bling are helping drive luxury sales, says Unity Marketing, which conducts quarterly shopper surveys. One cohort, called the "X Fluents" -- for "extremely affluent" -- are responsible for 23 percent of luxury sales in the U.S., up from 18 percent in 2007, the Stevens, Pennsylvania-based firm said in a Sept. 14 client presentation it provided to Bloomberg News.

"The U.S. marketplace is more concentrated among young people," said Unity President Pam Danziger. "They are more predisposed to luxury indulgence and represent more promising targets to luxury brands."
X-Fluents were out in force again last month, she said.

Another group that Unity has dubbed "Aspirers" are also spending more on luxury, according to Danziger. They favor "flash, bling and status" and now account for 18 percent of luxury sales compared with 16 percent in 2007, she said.

In the past, affluent shoppers' willingness to buy baubles has been tied to the stock market because its performance affects the perception of their own wealth -- the so-called wealth effect. Luxury was the hardest hit retail segment during the financial meltdown three years ago; sales in the U.S. plummeted 9.1 percent in 2009, according to the International Council of Shopping Centers.

Declining aggregate living standards across the USA are not equally dispersed. Therefore companies appealing to either extreme appear to be prospering while those appealing to the middle class are having a more difficult time since their demographic is under the most pressure.

Costco, Bed, Bath & Beyond, Ross Stores, TJX Corp, Dollar Tree Stores, Dollar General Corp and Family Dollar Stores all share a common trend of absolute and relative outperformance. They have all been spared from the concerted selling pressure that assailed stock markets from late July and a number of have gone on to post new highs. They would need to sustain moves below their August lows to question the consistency of their respective medium-term uptrends.

Walmart is a dividend aristocrat and yields 2.67%. The share has been largely rangebound for a decade but has held mostly above $50 for the last three years and a sustained move below that level would be required to question medium-term potential for higher to lateral ranging. Target Corp has more in common with Walmart than the above shares from a chart perspective.

In the luxury brands sector Polo Ralph Lauren, Tiffany, Nordstrom and Coach have held up better than most and remain in relatively consistent medium-term uptrends.

Saks Inc pulled back rather sharply in August but has stabilized. A sustained move above $11.50 would increase the potential for a resumption of the medium-term uptrend.

Macys Inc, while not a luxury hallmark, does cater to those who aspire to a higher spending bracket. It remains in a relatively consistent medium-term uptrend, defined by a progression of higher reaction lows. A sustained move below $22 would be required to question potential for continued higher to lateral ranging.