The economy is slowing with consumer spending in decline. ABS data released in December showed consumer spending was outstripped by household saving for the first time in five years while the retail sector has slumped to its weakest level since the 1990s.
Yet in the media we hear one day that consumers are cutting back, the next they are buying more local produce, personal services or cool technology. So, what’s going on? The truth is we’re doing both — we’re in a two-speed economy.
The real villain is commoditisation. As spending slows and informative online sites demystify the world of consumer goods and services, consumers perceive products as substitutable. They switch easily and are less loyal. But in a commoditised market, sociographic analysis has helped us understand there are two fundamentally different types of consumers with different reasons behind what they buy and why they buy it. Our analysis has used 800,000 respondents across 10 years of data. We have examined 100 behavioural factors and 82 attitudinal factors.
It turns out demographic factors such as age, occupation, education and even income are not as important as we might believe in driving consumption behaviours. It is a mindset. In the economic slow lane are 10 million Australians motivated by the traditional factors we’re trained to expect — discounts, price, features and status. As economic conditions slow, these “traditionals” of all ages and incomes (even traditional millennials) cut back on their spending, only venturing out when the deal is so good, they can’t resist. To a traditional, the deal is everything, whether it comes from the best price, the most features, the highest status or, increasingly, all three.
So who is spending?
A good percentage of consumers are demanding products and services that offer a more premium-value proposition. Premiumisation is a trend impacting nearly every category, including telecommunications, fast-moving consumer goods (FMCG), financial services, travel, utilities, automotive and retail. Driving this is a breed of consumers who are active, confident and optimistic, rejecting the traditional orthodoxy of price, deal, features and status in favour of design, provenance, quality, authenticity, ethics and brands that stand for something. These are the new economic order (NEO) consumers. They make their buying decisions on a measurably broader range of factors.
These consumers — 4.7 million in Australia and 60 million in the US — are big spenders in any economic cycle. Right now, in this spending slump, 91 per cent of them, according to research by Roy Morgan, are still in the top third of elective spenders in the economy. Traditional consumer confidence is below GFC levels, while the premium NEO consumers are a good 20 points ahead — and the gap is widening. Our modelling reveals traditionals are building security and slowing their spending. NEOs are building wealth and increasing their spending. You can do well serving the traditional camp, but you’d better not be second on price. And you won’t succeed treating NEOs as “targets”, they want you to speak to “me”.
Dr Ross Honeywill is executive director Centre for Social Economics and associate professor Tasmanian School of Business and Economics.