Chapter 1
Current consumer sentiment
Data about the erosion in confidence echoes through the daily media. However, perhaps what isn’t appreciated is that Australians typically worry more than peers in other countries even when, on paper, the prevailing conditions may not be as adverse.
Our latest research shows that the current levels of concern in some of the key pillars of life (personal finance, job security, housing affordability and the cost of living) are higher than in some comparable nations. It is a dynamic we saw through the 2008 financial crisis and the start of the pandemic in 2020, when higher levels of anxiety about the future prevailed in Australia.
This elevated apprehension is hard to shift and the talk of a recession, the first in Australia since 1991, exacerbates the concern. Most consumers under the age of 50 have no real reference point for what this means, having not been in the workforce the last time Australia experienced a fall in GDP over two successive quarters. This time round, the conditions are also different and set apart from what happened in 2008 during the Global Financial crisis as the Reserve Bank is methodically ratcheting up interest rates and unemployment is at a near 50-year low.
Interest rates are a highly emotive topic in Australia. Rate rises directly impact the approximately one-third of Australians with a mortgage, with the spotlight focused on the 1.2 million Australians on a fixed low-rate loan who need to refinance in 2023-24. There is also the roughly 30% who rent and are affected by rate rises (and concurrent lower rental availability) as reflected in record high rent levels. Renters are a segment that skews disproportionately to lower-socio-economic groups. Interest rate increases also flow through to the biggest collective employer in Australia, small to medium sized businesses, who equally experience high loan repayments – funds that can often be secured by personal property.
The Future Consumer Index shows the impact of rising interest rates and the cost of living. Two thirds of people with a mortgage say they are under pressure and changing their behaviour in some way to cope, with one in four (24%) worried about potentially having to sell their property. That sense of vulnerability is confronting, if not overwhelming.
The fragility of the Australian housing market and tension in the economy was clear in the International Monetary Fund’s warning that the level of risk in Australia’s housing market was the second-highest in the developed world.
Cost of living
Overlay the mortgage pressure with the cost of living, not the least of which is the cost of energy which rose by roughly 25% from 1 July, and it is no surprise we are seeing consumers adopt a more conservative approach.
Australian consumers
51%
are purchasing what they see as only the essentials
35%
are trying new brands to reduce costs
34%
plan to shop less for non-essentials in the future
While there has been a financial savings buffer and something of a spendthrift mindset across experiential categories like dining out, travel, entertainment and events in recent rounds of formal spend data, this will likely taper in the coming months.
One critical area of relevance in understanding current behaviour is the sense of job security. While 36% of employed Australians expressed some concern over their job security in our recent research, that level has been relatively stable over the past two years and is well below what we saw at the start of the pandemic. It’s a function of sustained low unemployment levels. In part, it perhaps helps explain the resilient spending behaviour that the Reserve Bank of Australia (RBA) has been trying to reign in with the rapid-fire interest rate rises over the past 14 months.
Talk to our team to discuss the Future Consumer Insights relevant to your organisation that can help you adopt a fresh and forward-thinking approach, ultimately benefitting your customers.
Chapter 2
How does uncertainty impact consumer behaviour?
Organisations must consider both prevailing and emerging trends to stay relevant to consumers in a time of profound uncertainty.
The environment is dynamic, consumer behaviour is erratic and organisations need to understand the shifts to stay relevant to customers. Four to emerge in our recent wave of the Future Consumer Index are:
Downshifting spend
There is a flight to value, with consumers showing restraint and more assertively managing the household budget. Increased price sensitivity sees them trading down in many areas and our data is showing that the proportion of people intending to ‘spend less’ across 24 categories we track is at the highest level in 15 months and higher than we are seeing in some comparable markets.
Reducing spend is difficult in an inflationary environment where consumers are often paying more to get less, but it underlines the mindset. While retail sales have been reasonably strong in many categories in the first half of the year, the march towards more constrained and clinical spend behaviour will not slow.
Adapting to this requires a layered understanding of all the elements that combine within a category to deliver value in the eyes of consumers.
Substitution
Switching behaviour is on the rise in many categories and won’t abate anytime soon.
While consumers may not have been giving a second thought to what they were putting in their basket since the pandemic has faded, large proportions are now ‘thinking twice’. They are less likely to purchase by rote and this is driving greater brand promiscuity. This comes to the fore in the upswing in purchasing or private label.
Australian consumers
37%
Say they switched to a private label to save money in recent months
66%
say private store labels satisfy their needs as much as branded products
55%
think supermarket labels are increasingly offering better quality products
The improved quality and experience is being recognised and embraced by consumers. The key point about this private label switching behaviour lies as much in the mindset it represents as the actual change to store brands. Consumers are prepared to break allegiances and are becoming more mercenary. They are looking in their peripheral vision for brands and products that might offer a comparable experience and better value.
Interestingly, it’s also not a one-way street for the store brands, as 73% of the consumers involved in the research felt store brands have been increasing their prices in recent months and 56% felt they are charging more premium prices.
Homeward bound
How people are looking to spend their time and by default their money will continue to change in coming months and beyond.
Our research shows that large numbers of consumers are looking to spend even more time in and around the home as the impact of the cost of living plays out and household budgets are compressed.
Australian consumers
35%
say they will spend more time at home than they are doing now
22%
say they will spend more time entertaining at home than they are doing now
The shift in behaviour will drive consumption patterns, requiring brands to focus on at home behaviour to maintain their relevance to this new consumer. Not surprisingly, the dynamic is prevalent among those with children under 18 at home.
Compromise counterbalanced by indulgence
While there is a more austere approach at play, this doesn’t mean that consumers will cut back everywhere all of the time. Retail figures, as already mentioned, are showing that different sectors have moved at different speeds.
As consumers look to manage the current environment, they will still be looking to reward themselves and indulge, albeit in a different way and perhaps at a lower level. Balancing restraint with reward is base level human behaviour and creates opportunities for brands that have the best understanding of the consumer in their segment.
5 strategies
Strengthening your brand with Australia’s future consumer
Brands that adopt a strategic approach, strengthening customer relationships by better aligning with the new consumer mindset, will build resilience through the downturn.
Not every consumer experiences an economic downturn in the same way, nor does every brand. For example, some companies came out of the GFC in stronger shape. LEGO’s profits grew by 63% during the GFC as it expanded into Asia. Groupon, despite launching at the epicentre of the economic crash, grew rapidly because it gave consumers and businesses a way to ride out the recession. Similarly, Domino’s changed its signature pizza recipe in 2009, boosting sales and profits following a multi-million spend on research and marketing.
Of course, for every success story in the past, there is a counterpoint of a company that failed to adapt to the times. However, one of the key lessons for brands from the past is to not solely turn inwards to a defensive strategy of managing costs and maintaining margin. The volatility of the times should be a catalyst for thinking differently and progressively around opportunities to further strengthen the relationship with consumers to drive long term growth, while concurrently improving operational efficiency and reducing costs in areas of less strategic importance.
To successfully navigate the roiling economic conditions, brands need to be relevant – and that means consumers need to be at the centre of strategic thinking.
5 actions to connect with consumers
While a more cost-conscious mindset invariably comes into play in shaping purchase behaviour, people still expect major brands to be doing the right thing and evolving, even when times are tough.
Economists often observe that nations enter recession at a sprint but come out at a much slower pace. The 12th EY Future Consumer Index suggests they may once again be right, as a quarter of Australians expect the economy to be in a similar position in three years’ time and just over a third (34%), anticipate it will be worse.
Summary
Brands need to manage for now, but equally play the long game to maintain margin, drive growth and to position themselves for a more confident future consumer. Central to success will be to have the consumer at the centre of thinking and scenario planning, focusing ‘outside-in’ to identify opportunities and strengthen the relationship.
