This weeks inflation figures show that March quarter’s inflation fell to 1.6%, the lowest annual rate since late 2009. Most of our economic commentators are now predicting an interest rate cut by the Reserve Bank as a forgone conclusion. But if brand owners are expecting that a cut in interest rates may do something to awaken Australia’s consumers from hibernation, then they need to have a re-think. We seem to be moving to a low inflation, low interest rate and low growth world – brands will need to therefore adapt.
A great article last month on the Economics Students Society Australia (ESSA) blog http://economicstudents.com/2012/03/australias-household-saving-ratio/ reviews the question of consumer caution. There is no doubt businesses seem to be simply holding their breath waiting for consumers to return to pre GFC spending and saving habits. But in the blog by Sharon Lai referenced above she rightly questions the notion that todays perceived consumer caution implies that consumers will begin spending more strongly once confidence returns. She argues the consumption binge from 1995-2005 occurred in the context of atypical factors and is unlikely to return.
She states. ’It was underpinned by the financial deregulation, ease of credit availability and relatively stable economic conditions prevalent during that period. The combination of these factors led to rising household leverage and high confidence levels, culminating in strong consumption growth and lower saving ratios. It was bound not to last, and an inevitable reassessment of consumption behaviour was awaiting only a trigger.
That trigger of course, was the GFC. The aftermath of the crisis led to general uncertainty and growing recognition of the risks of indebtedness. Households’ attitudes towards debt shifted, instigating a change in spending behaviour more consistent with historical trends. The rate of growth towards current saving proportions has been significantly faster than the fall in preceding decades, indicative of a rapid adjustment to a more sustainable balance between consumption and saving by households. Following an extensive period of rising debt, households are now deleveraging and consuming at a rate they are comfortable with. There is unlikely to be a relapse toward the low saving ratios of the early 2000s.’
When you review the chart below showing the trends in average Australian household savings ratios it suggests that we may indeed be simply getting back to the norm….forget abnormal. Start thinking about a consumer world where normal savings ratios are more like 10-15% of household incomes.
If ever there was a time to get close to your consumers to understand their true desires and needs, now is the time. A more discerning consumers demands a more discerning brand manager. The tough market place we are all operating in today, is not going to change for the better in the near term. In fact if there is any change, it is more likely that it gets even tougher, particularly if Europe continues with its wobbles and the US cannot sustain any meaningful kick-start to their economy.
As we Hawthorn supporters say, when the going gets tough, the tough get going….but for brand managers the need is both tough and smart.