Thanks to the Recession, Millennials Are Actually Pretty Frugal

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Claire Suddath for Businessweek 2014-04-26 13:15:23 UTC

Remember all those articles in the early aughts about how millennials were egotistical, privileged brats who copied whatever Paris Hilton did? (Side note: Hey, remember Paris Hilton?) As the Seattle Times put it in 2005, these kids had become "the best-dressed, least-able, least-equipped generation ever."

None of this is true — at least, not any more. Thanks in no small part to the worst economy since the Great Depression, millennials turned into functioning adults. They have a little less disposable income than they expected, which means that consumer companies are now changing to serve them. It turns out that today's 18-to-34 set likes clothes and gadgets and cool stuff just as much as earlier cohorts; they just don't buy quite so much.

A study by the Intelligence Group, part of the Creative Artists Agency, tracked the shopping habits of 1,300 people aged 18 to 34 (as well as a smaller group of those aged 14 to 17.) A little more than a third of the millennials in the study buy only "necessary" purchases — not exactly the prodigal children of popular imagination.

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"Every young generation gets criticized by the older ones," says Jamie Gutfreund, chief strategy officer of the Intelligence Group. "Gen X were slackers, boomers were those crazy hippies." The millennials, she points out, "came of age during a period of unprecedented economic wealth and were the most materially gifted generation that had ever existed before." It all amounted to a reputation for materialism in the early 2000s — until everything changed with U.S. economic turmoil. Joining the labor force during and after the recession, with its stunted job market, "was a little bit of a perfect storm," Gutfreund says. "They're now much more specific and intentioned with what they buy."

As a millennial, I always enjoy an opportunity to turn to my older counterparts and say: "See, I'm not as narcissistic and entitled as you thought!" But if you've been paying attention to generational trends, the new study fits perfectly with other research that's been done on millennials' financial savviness and caution. A lot of this is the result of a recession from which many young people still haven't recovered. The average college graduate now enters the job market owing about $30,000 — just under the $34,500 average salary that someone with an undergraduate degree makes right out of college. (Which, by the way, is the lowest starting pay since 1998.)

In fact, a 2010 report from the Urban Institute found that the current generation has an average level of wealth 7% lower than people in their twenties and thirties enjoyed in 1983; this trend predated the recession. And considering the income stagnation that has dislodged the American middle class from being the world's wealthiest, things might not improve for millennials for quite some time.

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That doesn't mean millennials won't go shopping. They just do it differently than preceding generations. And in order to get their attention, companies need new approaches to marketing.

Nearly three-fourths of millennials do online research before buying a product. They also "prioritize access over ownership," as the Intelligence Group study puts it, which basically means millennials prefer Spotify and Netflix to CDs and DVDs. This non-ownership tendency extends to the rise of Zipcar, Rent the Runway, and services that don't require a major financial commitment. When researchers ask millennials what they value, Gutfreund says responses tend to focus on experiences such as travel — things, she notes, "that can't be taken away from them."

When young people do buy something, they shy from flash-in-the-pan trends to favor more durable purchases. In response, the Intelligence Group notes, companies have been "de-branding" their designs. Denim companies, for example, are selling a lot of dark and plain jeans that will stay in style for years. And the browsing habits of millennials favor brands with seamless digital-to-storefront experience whereby what's available online is also what's available in stores.

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This newly frugal generation has also inspired a rise in peer-to-peer, online resale markets. The Intelligence Group reports that more than half of millennials consider the resale value of an item before they make a big purchase. A lot of this is still done through established third-party sites such as EBay and Craigslist, but retailers like Patagonia have started to get in on the action, too.

There is one money-spending trend that the Intelligence Group study doesn't fully explore. Millennials are about to enter the home-buying, family-starting age en masse, and that's when big-ticket purchases become unavoidable. Right now, millennials make up about 25% of the U.S. workforce and spend about $200 billion a year. By 2020, when they will become the majority of the workforce, the study estimates, their annual spending will have doubled.

Just don't expect them to buy houses and raise families the way their parents did. "They watched their parents work, work, work, buy the big house, and then lose their pension and have it taken away from them," says Gutfreund. "They're looking at that model and thinking, 'I want to do this differently.'"

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