Frugal times

Customers will take a few years before they will be willing to pay premiums for luxury items and increasingly look for superior quality at everyday prices. Cheaper may be a political slogan that will fill our headlines for the next few months, but consumers will be looking for value rather than volume.

Around the business world, success will flow to those that recognise that service quality and home-based product ranges will be growing at the same time as elite offers and luxury ranges will be under pressure.

This week we will get the Michigan Consumer Sentiment report that is likely to show a further decline in American consumer confidence, following their Conference Board report that showed that consumers continued to rate current conditions unfavourably in July but were starting to believe that things might not be getting any worse.

Those claiming jobs are “hard to get” increased to 48% while those claiming jobs are “plentiful” decreased. Overall, consumers remain quite pessimistic about the short-term outlook. The percent of consumers anticipating an improvement in business conditions over the next six months continues to slide.

When our economic stimulus packages turn into interest rate hikes, the US “C for C” (cash for clunkers) payments run out to get gas guzzlers worth less than five grand as a trade-in off the road, bail outs for parsimonious banks have passed us by, and the European economies get out of long technical recessions, we will all be encouraged to keep our wallets open and think of the national interest.

The Government has been jawboning the success of the Aussie economy on the basis of the latest Westpac Consumer Sentiment report which asserted that the message is clear: “As far as consumers are concerned, the worst of the current downturn appears to have passed,” according to Westpac’s Senior Economist Matthew Hassan.

“The current surge has seen this index rise back into solidly optimistic territory. The Index is now up a staggering 43.6% from its 2008 low, to its highest level in nearly two years. Remarkably, sentiment is now just 1.6% below its 2007 average.”

Hassan, commented: “The rise extends what had already been an extraordinary rally in confidence over the previous two months. The index is now up 27.8% since May, the biggest three-month gain since the survey began in 1975, and by a wide margin.” Indeed, the only comparable surges in sentiment were seen coming out of the recessions of the early 80s (+22.8%) and the early 90s (+20.3%) – and both of these rallies still left sentiment in pessimistic territory overall, with the Index below 100.

In a similar mood for Australia, Gary Morgan says: “In a week where people were focussed on environmental issues and the Emissions Trading Scheme legislation, and worldwide news of the US economy improving, the weekly Roy Morgan Consumer Confidence Rating has soared (123.0, up 6.8pts) to its highest level since December 2007.”

“Strong rises in all indicators are behind this weeks’ rise – and Australian’s expectations of continued strength in the Australian economy over both the next year (36% expect good times – the highest since January 2008) and next five years (50% expect good times – the highest recorded this century) show Australians are increasingly confident the worst of the global slowdown is behind us.”

“Of slight worry though is that the number of Australians saying ‘now is a good time to buy’ major household items (49%, up 2%), remains slightly below the averages for 2006 (52%) and 2007 (52.5%), though it is well above the average for 2008 (36.9%).”

Despite these recent releases from Westpac and Morgan proclaiming the end of the worst of our fears and the efforts of Malcolm Turnbull to get everyone to believe that debt is escalating, the reality is that consumers around the world have decided to change their lifestyles to reflect frugal times.

While the equities markets around the world reflect a return to investors from inventory reductions, staff cuts and hoarding of capital, consumers are making a dramatic change in their purchase expectations. Just take the pattern of the world’s biggest discounters which have seen consumers rush in for bargains but cut their overall level of purchases. Profits are marginally up while sales revenues decline.

While stores like David Jones have been doing well, they too have seen the change in the pattern of consumption and have been managing their inventory very closely to align with consumer sentiment. Stores like Tesco and Woolworths are promoting themselves as credit card and financial institutional promoters to try to get more of the affluent households to build their in-store volumes as the frugal feature strikes home.

The hot tip for the next few months is to focus on identifying the products and services that enable people to enjoy local life, spend more time with families and ensure outstanding value through such promotions as gifts with purchase, on-time delivery with easy return policies and deep discounts for volume purchases.

Smart companies will take all of this in their stride by continuing to get closer to their customers, reducing their range, building quality sales teams and becoming intensely focussed on their terms of trade. Companies that do not pay attention to their internal cashflow and manage their security policies must learn from the multi-million dollar fraud cases that are just coming to light.

Finding ways to ensure that everyone on the team is committed to company profitability is an essential element in the process of building both morale and sustainable profits. Now is not the time for unjustified euphoria.

Dr Colin Benjamin
Entrepreneurship and Strategic Thinking Consultant

Marshall Place Associates offers a range of strategic thinking tools that open up a universe of new possibilities for individuals and organisations committed to applying the processes of innovation, creativity and entrepreneurship.

Email dr.colinbenjamin@marshallplace.com.au
Contact: CEO Dr Jane Shelton, Phone +61 3 96400099

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