As the recession grinds on, how much will Generation X and Generation Y spend? Will it be Z, as in zilch? It looks that way for some San Diego companies that appeal to the youth market. But others aren’t suffering as much, partly because of astute planning.
First, who are the Generation Xers and Yers? Generation X is that population cohort that followed the baby boomers (who were born between 1944 and 1964). Generation Xers were born between 1964 and 1984; some are middle-aged, but others are still in their 20s. Generation Y, also called the “Millennials” or “Echo Boomers,” were born between 1984 and the early 1990s. They are the offspring of the baby boomers. Some are in their 20s, some are teenagers.
Teenage unemployment (boys and girls 16 to 19) was a stunning 22.7 percent in May, although only 38.5 percent are participants in the labor force, versus 65.9 percent for the overall population. A recent report by Scarborough Research found that 62 percent of teens go to malls as often as or more often than they did six months ago; however, 43 percent said they spent less on their last visit. Both Xers and Yers have experienced recessions before, but generally, they have enjoyed debt-generated affluence throughout their lives and are finding it difficult to slash spending and pay off debts. Many are overextended in mortgage and credit card debt and are traumatized by layoffs.
Orange 21 of Carlsbad targets those from 17 to 35 years of age. Generation Y is its major market. The company’s primary products are sunglasses and goggles, selling under the names Spy and SpyOptic, for action sports such as surfing, skateboarding, snowmobiling, skiing, and motocross. The company has a history of losses: the accumulated deficit is $32.5 million. But last year, the company lost a bundle: $15.2 million, and for its most recent quarter, sales are down 36 percent, although losses are not much different than they were a year ago.
Matt Harkins, brand manager for Spy products, says customers are not cutting back on participation in action sports. The company has introduced some lower-priced products, but the more expensive ones are still selling. The financial losses are partly a matter of inventory corrections, he says. Overall, “We are prepared for a challenging retail environment for the next six to eight months.”
The company has not made money since its initial public offering of 2004, when the stock price spiked up to almost $11. It’s now 80 cents. In its last annual filing with the Securities and Exchange Commission, the company admits, “Although we believe we have sufficient funds to operate our business over the next twelve months, our existing sources of cash and cash flows may not be sufficient to fund our activities.”
Last year, Orange 21 ran into a curious dilemma. A company that owned 14 percent of its stock was also a customer behind on its payments, owing $429,000. Around the same time, Orange’s former chief executive claimed that the company owed him $600,000. Both disputes have been settled.
Charlotte Russe Holding sells moderately priced fashion merchandise to woman 16 to 29 years old, spanning both Generations X and Y. There are almost 500 stores in 45 states and Puerto Rico. Clearly, younger women are not buying as they once did. Same-store sales (revenue in stores open at least a year) dropped 8 percent in the most recent quarter, in which the company recorded a modest loss. Charlotte Russe explains it has to mark down prices more aggressively. The company says the “uncertain economic outlook” has negatively affected mall traffic and consumer buying. The company lost 4 cents a share in the quarter, compared with a profit of 17 cents a year ago. For 2008, earnings per share were 79 cents, down from $1.43 in 2007.
In 2007, a special committee of the board did a comprehensive review of Charlotte Russe and determined that “significant changes were necessary to improve operational performance,” according to an official filing. The company brought in a new management team. In January of this year, Charlotte Russe put itself up for sale and in March said it may have potential buyers. The company refused to be interviewed.
Carlsbad’s NTN Buzztime provides interactive electronic entertainment in restaurants and sports bars — trivia quiz shows, play-along sports programs, casino-style games, and the like. It has almost 4000 subscribers. But NTN has been a loser for years. It has a cumulative deficit of $105.4 million and lost $6.5 million last year and $5 million in 2007. First quarter revenues plunged 14 percent. “We may not be able to achieve or maintain profitability,” says the company. One reason: topside turmoil. There have been “significant changes in executive leadership,” says the company in a filing with the Securities and Exchange Commission. One chief executive resigned in May of last year, and the interim chief resigned in November. “Changes in senior management are inherently disruptive.”
That’s one reason that a Cayman Islands–based hedge fund, Trinad Capital, which owns almost 15 percent of the stock, says it has evidence of mismanagement, fraud, breach of fiduciary duty, and waste of corporate assets. It has filed a lawsuit and announced it may attempt to wage a battle for control of the company. NTN did not respond to several phone calls.
There are some success stories. The core audience for hamburger and sandwich chain Jack in the Box is men 18 to 34, says spokesperson Kathleen Anthony. But the addition of premium entrée salads and sandwiches attracts “a wider customer base,” including women and older consumers, says Rochdale Securities, which is bullish on the company. Actually, Jack began moving toward an adult market in the 1980s, says Anthony. Now the company is undergoing a brand-reinvention process that includes upgrading its audience, with the goal of grabbing a larger demographic. The company’s earnings remained flat last year, and that’s not bad at all for a consumer company in this economy. In the most recent quarter, same-store sales were up 1.1 percent — good for the fast-food industry, and any industry.
However, analyst R.J. Hottovy of stock-research firm Morningstar warns that Jack’s competitors are much bigger. McDonald’s, Burger King, and Wendy’s/Arby’s Group control three-fourths of the U.S. fast-food business. Jack has to hustle.
In the most recent quarter, same-store sales at Carlsbad’s Rubio’s Restaurants were up 1.9 percent. However, the number of transactions fell by 5.8 percent. That was offset by the average check coming in 8.2 percent higher. With its prices rising in a weak environment, the company says it fears a “loss of price-sensitive customers.” That could include Xers and Yers. Last year, same-store sales were down 2.4 percent, and transactions were down 5.7 percent.
Bottom line, it appears that companies only aiming for the Generation X and Y markets may have to find ways to reach us creaky old folks. But I, for one, will never participate in motocross or play a casino-style game at a sports bar. Most of us Depression babies feel the same way, I suspect.