The Fall of Discretionary Spending

Netflix is just a case in point. Netflix last month revealed that it had lost customers for the first time in a decade. At first analysts believed that this was so, since clients had turned off their Netflix subscriptions for cheaper platforms. This was not the case. Further analysis revealed that in the two weeks after cancelling their subscription to Netflix, 87% of subscribers had not signed up to a rival service, with many of those that left the streaming service aged between 18 and 24 or in households with a low annual income. This suggests that higher inflation is leading the fall of discretionary spending. Global research is indicating that the persistent rise in prices of core basic goods means that people are shifting their expenditure and hence reducing their discretionary spending.

International research is showing some constant trends that customers are cutting spending mostly on Dining out, Entertainment, Organic or Premium Groceries, Vacations & Travel and Clothing & Fashion – these are the sectors showing a likely reduction in spending of 30% – 40%. There are obviously declines in other sectors with such declines ranging from 15% to just under 30%.

The latest HICP for Malta (below) for April 2022, clearly outlined that the greatest annual rate of inflation is coming from basic items like Food & Non-Alcoholic Beverages. Indicative is the very high monthly increase in prices from Restaurants & Hotels, which I am sure is compounded by an increase in food raw material prices and lack of human resources in this sector.

So the question is – How should businesses, especially those reliant on discretionary spending adjust their positioning and strategies to survive? I have already addressed this in some of my past articles – Click HERE and HERE. However I will today provide some additional pointers.

The key reply is that businesses need to be prepared and plan! Businesses should be prepared to make sure that they can withstand the impact of the rising inflation. The primary concern is surely wages – surging inflation means workers’ pay packets are falling behind in real terms. Add to that the tight labour market, many employees will seek higher wages putting the onus on businesses to boost their compensation. Is this being planned and budgeted for by businesses?

Businesses should also turn their focus to high margin goods and services. To improve business performance, pushing marketing and promotional activity on high turnover items, that have a good profit margin is the way to go. On the other hand, businesses need to become more clinical in reducing or removing products or services that have low turnover and low profit margins.

Focus on your cashflow! To keep cashflow as stable as possible, businesses should also keep a close eye on their invoicing habits and debt collection – Credit checks are vital and credit limits must be set and regularly reviewed. You cannot end up having to increase your bank overdraft or increase bank loans to finance your increasing amount of debtors – especially as interest rates will now likely start increasing.

Innovation is key. Think out of the box in your proposition. This could including offering more value by packaging things together or offering new financing options to make it easier for clients to buy your products or services.

Well, there are choppy times ahead. Please prepare yourselves well and fasten your seat belts!

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