Consumer spending patterns and retail implications
Deloitte Access Economics Weekly economic briefing, 28 February 2012
Below is an extract from the Weekly Economic Briefing by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart, Deloitte's Chief Economist in the UK.
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David Rumbens on Australian consumer spending patterns
Australian retailers are lamenting two years in a row of poor outcomes. Sales growth over the two years of 2010 and 2011 has been just 1.7% in real terms (after accounting for inflation). That doesn’t even cover population growth over that time (of 3.0%), and is a long way short of expectations of ‘normal’ retail sales growth.
Part of the blame for these poor results has gone to more purchase from overseas online retailers, though Australian retailers are now more aggressively picking up their online presence. The rate of household saving has also become entrenched at a level much higher than we have been used to seeing over the past two decades (though the savings rate now appears to have levelled out rather than rising further).
Another factor against retailers has been the longer running trend of consumers spending more of their budget on services (both necessities and luxuries), and rather less on the types of goods which retailers sell.
The Australian Bureau of Statistics released the results of its 2009-10 Household Expenditure Survey (HES) late last year. The HES is a survey of around 10,000 households across Australia, collecting information about their expenditure on over 600 items, and conducted every six years by the ABS.
Over the past six years, we are spending more of our total household budget on rent and mortgage interest payments, health insurance and medicines, private school fees, child care, pay TV fees, internet charges, overseas holidays, takeaway and restaurant meals, and on donations and gifts to charities and friends.
On the other hand, we are spending less of our total household budget on food staples (such as bread, meat, fruits and vegetables), furniture, household appliances, fixed line telecommunications, home computer equipment, books and magazines, tobacco and toiletries and cosmetics.
Retailers are far more exposed to the latter group than the former
Looking further back over 25 years, the biggest longer term trend is that housing has been increasing its share of the total household budget, rising from 13% of household spending in 1984 to 18% in 2009-10.
On the other hand, food, clothing and footwear, and household furnishings and equipment have seen a decline in their share of the total household budget by around three percentage points over the past 25 years.
What has been driving these trends? Changes in spending patterns have reflected factors such as changes in relative prices, technological change and changes in consumer tastes and preferences, particularly as incomes rise.
Some of the changes in spending patterns are explained by price movements. Globalisation and technological changes in the manufacturing process have kept price growth in check over time for many products. Clothing and footwear and household furnishings and equipment have experienced very little price growth over the past two decades. So some of the loss in the share of the consumer budget seen by clothing and furnishing has been price driven, rather than driven by fewer purchases from consumers. Or in other words, in real terms consumers have been saving money over time on retail items, and then spending those savings on their house or on services.
The HES data can also be examined by income and age.
By income, the lowest income earners spend more of their household budgets on necessities, or non-discretionary spending, such as housing, food, fuel and power, household services and operation. They also spend a greater share on tobacco.
As income rises a greater share of the household budget is spent on non-discretionary items – alcoholic beverages, clothing and footwear, recreation, miscellaneous goods and services, and transport. Spending on transport rises substantially with income and, for the highest income quintile, is the largest category of spending.
By age cohort, older households spend much less of their budget on housing. Spending on housing declines from a peak of 25.5% for 25-34 year olds to 11.7% for those 65+.
Given their lower spending on housing, older households have more of their budget left over to spend on other goods and services. Older households spend more of their budget on food, recreation, electricity, health services, and household services than do younger households. Older households also spend less on transport – but seemingly only after they retire from the workforce, with the drop in spending apparent only for those 65+.