Link My iMpact  
Link Strategic Positioning Tool Kit  
To Executive Education
To Kresge Library
Claes Fornell
  Claes Fornell

Customer Satisfaction Plummets; May Signal Further Economic Slowdown

5/17/2005 --

First-quarter ACSI measures airlines, satellite and cable TV, phone companies, utilities, restaurants, hotels and more.

ANN ARBOR, Mich.—The satisfaction of American consumers has fallen dramatically, the latest American Customer Satisfaction Index (ACSI) shows.

The ACSI for the first quarter 2005 is 73, down 0.8 percent from last quarter—the second consecutive quarterly drop in aggregate customer satisfaction.

Factors driving the decline include falling inflation-adjusted wages, rising energy prices and declining quality, says Claes Fornell, director of the ACSI and professor at the Stephen M. Ross School of Business at the University of Michigan.

He adds that declining customer satisfaction may have a negative impact on the economy and, particularly, on consumer spending growth.

"This quarter's decline in customer satisfaction adds more uncertainty to the economy," Fornell said. "The economy's ability to generate increasing consumer utility is central to economic health and real economic growth. As declining customer satisfaction erodes consumer demand, a bounce back in spending next quarter is less likely.

"Based on ACSI alone, and without factoring in what may happen to wages or interest rates, the deterioration in ACSI suggests that consumer spending should grow no more than 3.2 percent to 3.6 percent in the second quarter of 2005."

Competition Tightens in Race between Cable and Satellite
According to the ACSI, the competitive landscape may be changing for the cable and satellite TV industry. Since measurement of the industry began in 2001, satellite has consistently bested cable by an average of 11 ACSI points each year. But this year, both DirecTV and EchoStar's ACSI scores weakened significantly, falling to their lowest ever.

To some extent, the satellite companies, which reported substantial customer growth in 2004, may have fallen victim to their own success, Fornell says.

"Increasing sales may, in fact, lead to lower customer satisfaction if the acquisition of new customers is not handled well," he said. "It will be interesting to see if the satellite companies can learn to better handle the larger customer load or if the cable companies will instead win back some old customers."

Fast Food Restaurants Improve, Large Gains for Burger King and Taco Bell
The fast food industry now has its highest ACSI score ever, up 3 percent to 76, although not every company improved. Taco Bell and Burger King registered the largest gains, up 6 percent and 4 percent, respectively.

After several years of difficulties, with many of its restaurants closing and with changes in ownership and chief executives, Burger King is turning things around, Fornell says. Customer satisfaction is up by 4 percent to an all-time high of 71. New products have been introduced and customer traffic is up.

Moving in the other direction, McDonald's is down 3 percent this year to 62-14 percent below the industry average and lower than any other competitor. However, it has avoided the usual punishment of customer defection, and both sales and profits have been solid, Fornell says.

"The risk for McDonald's is not that it is below the competition in customer satisfaction," he said. "This has always been the case and is not related to the company's financial fortunes because, similar to Wal-Mart, McDonald's does not need to match the level of customer satisfaction of its competitors.

"What may be worrisome for McDonald's is the change for the worse among its own customers, because there is a relationship between changes in McDonald's ACSI and changes in both sales per restaurant and store margins."

Hospitals Ailing, Airlines in a Holding Pattern
Patient satisfaction with the nation's hospitals declined significantly, down 7 percent to 71. This drop follows a 4 percent increase last year, more than offsetting the gain.

"Increasing costs appear to be the major reason for the drop in patient satisfaction," Fornell said. "Rising costs have led to a reduction of many employers' contributions to health care coverage, increasing many consumers' share of the bill for hospitalization. Although quality of care plays a role, it is not the main culprit here."

The airline industry remains at a score of 66 for a second consecutive year. In an economic climate with low margins, difficult labor relations and increasing fuel prices, the absence of change is probably good news, Fornell says.

US Airways has been hit the hardest, down 9 percent to 57, and is significantly below the industry average and at the bottom of the industry. It is emerging from its second bankruptcy in three years and several routes have been eliminated, along with service personnel.

"Although cost cutting may help short-term finances, the effect on service and passenger satisfaction is often negative," Fornell said. "For example, US Airways is not doing well with respect to on-time performance and passenger complaints. Frequency of mishandled baggage is growing as well."

At the other end of the spectrum, Southwest Airlines continues to lead the industry in passenger satisfaction. Like all carriers, Southwest faces a challenge from rising energy prices, but has benefited in the short term by stockpiling fuel at lower costs over the past few years, Fornell says. The airline also has cut costs via labor reductions, offering many of its employees a buyout package.

"Southwest has managed not only to maintain but also to slightly improve the level of its passenger satisfaction," Fornell said. "Considering the economic climate, this gain is quite an accomplishment."

About ACSI
The ACSI is a national economic indicator of customer evaluations of the quality of products and services available to household consumers in the United States. It is updated each quarter with new measures for different sectors of the economy replacing data from the prior year. The overall ACSI score for a given quarter factors in scores from more than 200 companies in 41 industries and from government agencies over the previous four quarters.

The index is produced by the Ross School of Business at the University of Michigan in partnership with the American Society for Quality and CFI Group, and is supported in part by ForeSee Results, corporate sponsor for the e-commerce and e-business measurements.

Company scores and other information about ACSI can be found on the ACSI Web site:

For more information, contact:
Bernie DeGroat
Phone: (734) 936-1015 or 647-1847