Research by ANZ and Roy Morgan has found that, since 2014, Australians have decreased their reliance on debt, while also saving more of their earnings. Reflecting this, the ANZ Roy Morgan Financial Wellbeing Indicator rose from 57.4 to 59.7; a 2.3 per cent increase. Today, consumers are saving 36 per cent more than they did 5 years ago, with median savings peaking at $5,580 in 2019.
Strong savings indicate that consumers are financially healthier than in the past, but that doesn’t necessarily translate to a healthier economy. Australian consumers are reflecting growing economic uncertainty around the world, and responding by reining in their spending at home. As a result, businesses are faced with an uphill battle when it comes to driving growth, and keeping both themselves and the country prosperous. However, by staying abreast of changing consumer behaviour, businesses can adapt to these changes to protect their interests, and keep the economy humming.
Consumers are reacting to economic uncertainty
There is more than one reason why consumers might increase the amount they save each month. In ideal circumstances, consumers might save more because their earnings are increasing, leaving them with more to put away at the end of each month. Currently, however, Australia is experiencing historically low wage growth. Consumers aren’t saving money because they have more, but because they are becoming more risk averse with regard to their finances.
This is a direct result of growing economic uncertainty both at home and abroad. The US-China trade war, growing uncertainty in many of the world’s biggest economies, the 2019 housing crisis at home, and the growing economic impacts of climate change are all contributing to make consumers more cautious than they were half a decade ago. This increase in savings, however, necessarily has to come at the cost of consumption.
Conservative consumer spending is defeating stimulus measures
When consumers use their income to save and pay down debts, rather than to purchase goods, the velocity of money decreases, and the economy is forced to slow down. This year it appears that even the government’s attempt to boost consumer spending has failed. As Westpac economist Bill Evans explains, the savings rate, which rose from 2.7 per cent in June, to 4.8 per cent in September, is “convincing evidence that uncertain households chose to save the tax and interest rate cuts, and then some.”
Rather than spending the money they saved as a result of the government’s stimulus measures, many consumers used it to pay down debts, or shore up savings instead. This has ultimately left businesses in a difficult position. An economy with stagnant consumer spending is one in which it is difficult to grow. To protect their interests, companies need to find ways to adapt.
Businesses need to find ways to respond
Simply hoping for spending to bounce back in the near term is likely to be an over-optimistic approach. The ongoing bushfire crisis and its projected impacts on the economy are likely to further increase uncertainty among both consumers and businesses. That means adapting to be able to grow even with a more savings-oriented consumer base.
In order to succeed in any context, businesses need to reflect the values of their customers. To do that, they’ll need to understand their problems and priorities, and then use that knowledge to become a part of the solution. In this case, that may mean helping their customers to save more.
Cut costs to bring down prices
Consumers make purchasing decisions based on any number of factors, including branding, product features, advertising, and price. As they become more savings-oriented, though, consumers prioritise the prices of goods more and more. To cater to these customers, businesses need to offer goods and services that are priced very competitively. That means finding innovative ways to cut production costs to help bring down prices.
Adversity creates growth opportunities
Most successful businesses constantly work to minimise costs to stay competitive even during the best of times.This makes cost-cutting extremely difficult, but it doesn’t mean that nothing can be done. Price-conscious customers are more oriented toward simple and utilitarian products and services, and businesses can take advantage of this to capture new customers who are looking for a good deal.
The economic uncertainty gripping much of the developed world is showing few signs of abating, and Australian businesses can expect to face continued pressure in the foreseeable future. They can, however, continue to pursue growth and success by adapting to the needs of consumers, and outcompeting others who fail to do so.