Resilience in Global Meltdown

CONSUMER SPENDING DEFIES THE FINANCIAL CRISIS

According to an international research study, consumer behaviour is more resilient than we think.

The world economy over the first decade of the twenty-first century has been impacted by terrorism, health disasters and military conflict. And over the past few months, the world financial market has seemingly gone into free-fall.

And yet as the world economy slows and conspicuous consumption finds itself in rapid retreat, a powerful current of inconspicuous consumerism continues unabated.

This is the ‘Spend More, Buy Less’ phenomenon fuelled by the resilient ‘new economic order’ or NEO identified by a research project analysing eight years of data from 800,000 respondents on three continents.

These NEO consumers treat the commodities of life as mandatory and focus their real spending and investing on what is known as elective consumption. So, for example, they’re buying less stuff and spending more on creating emotional experiences.

They are paying for yoga classes and private trainers; they’re drinking fewer glasses of wine but buying better quality; they’re travelling to places that enrich their spirit; they’re investing in a mix of liquid assets and smart opportunities in an opportunistic market; they’re paying a premium for premium advice when it counts; and they’re escalating their use of the Internet because it’s where they control the levers.

Because they define themselves by who they are and what they stand for, they don’t need to surround themselves with brands or symbols of belonging. They want quality, rich information, authenticity, flexibility and choice.

Using that most perfect of all sciences, hindsight, there are valuable historical lessons to be learned about consumer resilience.

On December 7th, 1944, the third anniversary of the Pearl Harbour attack, the Macy’s chain of department stores held a sale and ‘rang up the highest dollar volume of sales of any day in its history’.

Take premium wine sales during the last economic crisis – a perfect proxy for elective consumption. A retail wine study by professor Christopher Ruhm and William Black from the University of North Carolina, published by the US National Bureau of Economic Research, found that the premium wine industry was significantly more robust during economic difficulties than those wine producers operating in the lower-discretionary-choice markets offering lower-price points. The report attributed any overall decline in wine consumption to a reduction in spending by lower discretionary spenders (Traditionals).

At the end of that slump, Goldman Sachs reported that in the US less expensive wine had been sluggish and declining during the year, with the drop more pronounced in the previous six months. Conversely premium wine sales had been booming with the $US10-$US14 per bottle category continuing to grow at double-digits in volume (up nearly 15 percent for the latest period vs. the same period last year), with pricing continuing to increase slightly.

But it is not just any consumer that fires this resilience: it is the constant consumption of the new economic order that underpins the active use of money. And the last economic slump, NEOs out-consumed their more traditional cousins 2:1.

NEOs, while only one quarter of the population, represent the majority of the discretionary spending power of the economy and drink four times more premium and super premium wine than anyone else. Almost all, 92 per cent, are in the top third of discretionary spenders in the economy. They also buy twice as many books, fly three times more frequently, eat out at a restaurant five times more often, utilise phone banking five times more often, and dominate credit card use, risk insurance, investment lending and high interest online savings accounts.

Their appetite for high margin consumption continues unabated in the face of economic uncertainty and even through global military and terrorist conflicts.

It is however important to recognise that while their spending behaviour is resilient, it will shift under extreme adversity. High-end luxuries will be abandoned as they shift to shoring-up their psyche and their nest. They will shift their money out of equities into online cash investment accounts; they will extend their home or buy that new home on the waterfront; they will plan for investment property purchases when the prices and interest rates reach an optimal alignment. Their money must be active – in every economic climate. They just keep moving it around.

That’s what makes them resilient and what makes the conventional wisdom of consumer behaviour out of date.

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