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As last year ended, customer satisfaction with overall goods and services dropped, with retail companies falling last year compared to 2006. The University of Michigan-produced American Customer Satisfaction Index (ACSI) found that retailers ended the year with a rating of 74.2 on a scale of 100, down from 74.4 in 2006. The best-performing retailers, both with scores of 83, were Barnes & Noble and Publix Supermarkets. The Home Depot was at the list’s bottom, with a 67, while Wal-Mart was slightly above at 68. Supermarkets were the highest-scoring sector, hitting a 76 and advancing three years in a row, while department and discount stores were the lowest, at 73. Michigan business professor Claes Fornell, who is head of the ACSI and author of The Satisfied Customer: Winners and Losers in the Battle for Buyer Preference, spoke with GlobeSt.com about the index.

GlobeSt.com: Is there a correlation between a consumer’s satisfaction with a retailer, and that company’s financial health?

Fornell: If there was no relationship between how a company treated its customers and its financial health, then there is really something wrong with the marketplace. There has to be a relationship, and as a matter of fact, there is. They’re not parallel because the satisfaction, dissatisfaction or change in it, comes first. Then the company that really satisfies its customers to an appropriate degree – you can go too far if it costs too much – in general will see a financial benefit in doing so. And if you treat your customers badly, you get punished. We have found that in recent years, the punishment is tough. You get punished twice. First you get punished by defecting customers, and second, you get punished by investors who withdraw their capital, so the share price goes down as well.

GlobeSt.com: Wal-Mart ranks low on your list but just came off a relatively strong quarter…

Fornell: They are an interesting case and somewhat different. They had strong earnings, yeah, but only if you didn’t read the whole thing. The earnings that they reported that were strong were all overseas. Same-store sales for 2007 were less than inflation, less than 2%. That’s consistent with having some difficulty with their customer relationships. Having said that, Wal-Mart is different from most other retailers because the demand they have is not sensitive to quality and satisfaction as it is to price and household income. Wal-Mart can do well without having a high level of customer satisfaction. It can do much better than its competition because it’s such a formidable price competitor, and nobody can really follow that.

GlobeSt.com: Do chains that compete by price tend to have less customer satisfaction?

Fornell: It turns out that price has a positive effect on satisfaction, but the effect is much smaller than the quality effect. You’re not going to reap great benefits in customer satisfaction because of price. You don’t go to Wal-Mart to have a very satisfying experience. You go there because of price and budget constraints in your household. The paradox is as the economy improves, and the budget constraints are somewhat relaxed, that’s when they will have difficulty. But they will probably do well in a situation where we have some economic difficulties, although they would have to be careful then as well. The only way you can counterbalance customer satisfaction is to compensate with even more price concessions. Even for Wal-Mart, it will affect profit margins. With the declining dollar, and the things that they sell that are manufactured abroad, there may be an extra pressure point there. It is a very interesting situation. I wouldn’t worry too much about Wal-Mart in the short run. They’re not going to do great, but they’ll do OK.

GlobeSt.com: Does overall economic pressure, like we’re having now, tend to impact customer satisfaction?

Fornell: The index drops when the retailers have fewer resources because of the economic situation and cut customer service before cutting anything else. I’m not sure if that is the best way of doing things, but sometimes they might have no choice.

GlobeSt.com: Why is the grocery sector doing so well?

Fornell: This is a little unusual that you can have rising satisfaction and rising prices at the same time. The answer to that is that they have improved satisfaction over the years. Curiously enough, they have created a situation where they actually have some pricing power. It’s not much probably, but as pricing satisfaction improves, the demand curve shifts upward and makes room for the company to be able to sell more or raise prices. Now the companies are raising prices because the raw material is increasing in cost, and they are just following suit. So far, they seem to be getting away with it because they have reasonably high satisfaction.

GlobeSt.com: How well does retail perform compared with other industries that you track?

Fornell: It comes pretty much in the middle. Supermarkets are a little higher. Department and discount stores are a little lower. Specialty is at about the national average. Then you can find individual company scores that are a lot worse, like Wal-Mart, or better, like Nordstrom. But they have difficulty against the online retailers, which are doing much, much better.

GlobeSt.com: What are they doing right that brick-and-mortar shops aren’t achieving?

Fornell: There is a whole string of things. They as suppliers, and you and I as buyers, are learning and becoming much better at using this new way of making transactions. As everybody knows, the transactions are easy to make, highly efficient and you can get much more information without driving your car and sitting at your desk. It’s really a question of efficiency. As I wrote in my book, the supply of time is diminishing. Everybody in this country, and many other countries as well, have a shortage of time. That makes the whole online business more attractive to us. The things that take up more of our discretionary time will face difficulties.

GlobeSt.com: Was there anything about the index your found surprising, or can you predict any changes we’ll see in the future?

Fornell: I was a little surprised with the supermarkets. With the price of food going up, I thought they would have a difficult time dealing with that. But it has not shown up, and it may be because they have been doing things well and can withstand some of this, and they’re probably not blamed for it, either.

In the future, I can’t predict what these firms will do with respect to satisfaction. But I can predict fairly bleak economic times.

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