Discretionary Spending

All the research around the globe since the outbreak of COVID-19 and the various lockdowns has shown a huge drop in discretionary spending, whereby in some categories this plummeted by as much as 90% at the peak of COVID-19 lockdown efforts aimed at easing the spread of the virus.

Given that discretionary spending comprises a good chunk of the various economies around the globe (on average it constitutes from one-fifth to one-fourth of many countries’ GDP), I believe it is worth being informed on the insights and trends that all the research is showing from shifts in discretionary spending.

The key insights from the various research happening around the globe can be summarised as follows:

  1. Ticket size matters
    Consumers seem more likely to indicate plans to indefinitely postpone or cancel purchases for bigger-ticket items such as jewelry, vehicles and home construction or renovation than for smaller ones.
  1. Value polarisation
    The COVID-19 outbreak effected consumers’ thinking about price and quality, with increased price sensitivity and more careful consideration of non-essential spending. However, research illustrates how complex and multifaceted the concept of value truly is. The findings show that overall many consumers expect to reduce spending this year. However, consumers make a distinction between price and value. For example, consumers planning to shop for small domestic appliances are indicating that having various uses to such a small applicance is more important to them now than before the outbreak of COVID-19. On the other hand, research findings also suggest that for a subset of consumers, loosening restrictions could lead to a surge in spending.
  1. Preference for trusted brands
    Across countries and segments, respondents commonly mentions a “trusted brand” as a top consideration in their purchasing decisions, along with purchases being a good value for the money. Among respondents, market-leading brands retained significantly higher conversion rates—60% to 70%—than did other brands. Even among those planning to spend less than initially intended on a purchase, up to 60% to 80% in each country said that their preference is to stay with their intended brand—albeit by actively looking for a discount or promotion, or by switching to a cheaper product within the brand. This brand loyalty seems to be especially true for categories such as consumer durables, like for example household appliances.
  1. Uneasiness and guilt
    Amidst the uncertainty of the continuing global crisis, various survey findings suggest there might be a feeling of guilt associated with discretionary spending, even among those who can afford it—particularly for some more conspicuous categories. Although respondents consistently cited uncertainty over the crisis’s impact on their income as the top reason for planning to forego purchases, many consumers mentioned the feeling of guilt as their reason for doing so.
  2. Digital shopping accelerated, but physical shops retain appeal
    The COVID-19 crisis has naturally shifted consumers toward digital shopping and engagement channels. Yet the findings show uneven rates of acceleration across various types of online channels. Responses suggest that multicategory online marketplaces could be poised to gain the most momentum with regards online shopping, whilst at the same time, respondents also expressed the desire to return to physical shops—particularly to shop for mobile phones and small and large domestic appliances.

So what are the implications for businesses deriving the above conclusions?

Thriving in the post-COVID-19 future will ultimately require changes in how companies in these sectors think about staying relevant to consumers while managing increased operational complexity as well as potential delays in the rebound of demand and customer traffic. Combined with sales migration toward online channels and the renewed focus on value, these changes could contribute to margin compression. Moreover, there are certain behaviors that are likely to shift fundamentally, requiring reconsideration of the consumer proposition and companies’ go-to-market strategy and operating model. Research is indicating that there are five actions that companies can take now to prepare for the next normal.

  1. Don’t just reopen: Rethink your Shop

Companies have already invested significant time and effort to enforce new safety protocols and operating procedures as lockdowns ease. However, online acceleration will require a fundamental re-evaluation of the role that shops still play for consumers in the next normal and how to ensure a delightful experience. Survey responses show that shoppers appreciate the “touch and feel experience” of physical shops. As shops enable product interaction while also generating traffic for e-commerce sales, the traditional way of looking at your shop might need to change. Also, it is important to consider how this role can be accomplished with a simplified and more flexible shop operation. This entails reimagining end-to-end consumer engagement on digital channels and seamlessly linking online and offline experiences to radically accelerate in-shop omnichannel integration. Companies that are both digital and offline, rather than one or the other, will be better positioned in the days ahead—especially if they can use both to create a mutually reinforcing customer ecosystem.

  1. Earn and maintain consumers’ trust

Various survey results indicate a “flight to safety” toward trusted brands, potentially accentuated by an environment of uncertainty and inability to test or experience products before buying them. Moreover, with the COVID-19 crisis affecting incomes and savings, respondents seem to be more cautious in their brand choices. Companies with high brand scores can further grow their presence and business by communicating reliability and instilling further trust in the brand. For new and niche players, communicating reasons to trust, and ensuring a “first-time right” product experience, could become more important than ever.

  1. Radiate value

As shoppers look to purchase items that meet their criteria for value, it will be paramount for businesses to be able to immediately communicate to visitors to an online channel or shop how their products fulfill these criteria. This entails rethinking which “star products” to highlight, as well as reconsidering overall product assortment and promotional calendars to effectively lower the customer hurdle by highlighting relevant products and offers and by offering accessible entry price points. As we saw earlier, however, the concept of “value” can differ significantly by segment. Hence, executing this well requires a strong understanding of customer segmentation that enables a personalised approach. As consumers search for the best deals—and retailers face overstock from the present economic slow down—companies can benefit from being nimble amid a heightened promotional environment. Doing so may require adopting a rapid “test and learn” approach so they can quickly pivot to determine the most compelling offers for various customer segments.

  1. Follow the consumer

Research indicates that consumers are interacting with multiple channels and touchpoints, such as official brand websites, social commerce, online platforms, exclusive-brand shops and multibrand shops. As consumers use more channels, it is important for companies to ensure that their experiences at each touchpoint are consistent, generate delight and further enhance companies’ understanding of consumers. This requires brands and companies to not only be open to shifting their marketing messages but also investing in analytics capabilities and reallocating financial and people resources as needed.

  1. Communicate purpose

Research has been consistent at indicating that customers appreciate brands that exhibit a social purpose and communicate honestly about how the crisis has affected their service levels and overall business. As companies prepare for what comes next, they may need to rethink and adjust their marketing tone and message to reflect consumers’ new reality, given the social context and consumption guilt that could affect some purchases.

At EMCS we specialise in market research across various economic sectors. As things are changing very fast it is even more important to research the market you operate in. Feel free to email me on silvan.mifsud@emcs.com.mt to learn more. Below also please find an outline of our holistic approach to the various services we offer.

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