Spend or Don't Spend: Consumer Response to the Global Financial Crisis

Powered by Research Breakfast Series - May 15, 2009

Are you a Spender or a Saver? Dr Paul Henry, Chair of the Discipline of Marketing looks at how consumer behaviour is changing in the face of the economic downturn

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Consumer Spending, Saving and Budgeting in Uncertain Times

As nervous consumers react to a stream of economic bad news, many are tightening their belts. For some marketers the temptation to group all consumers under one bleak umbrella during a downturn can be irresistible.

The popular belief is that in a downturn, consumers are more likely to think carefully before spending, and that a dent in sentiment is shared by both those facing job losses or cut backs in working hours and pay, as well as the majority that will end up retaining their jobs. This view is supported by the contraction of dollar sales across many product categories such as automobiles, restaurants and cafes, alcohol, cigarettes and clothing (December quarter, Australian Bureau of Statistics). Supermarket food performance, on the contrary, has been more resilient as consumers on the whole stay at home.

Yet however tempting it is to conclude that all consumers behave the same way when times are bad, research suggests that this may not be the case. Understanding the general current of consumer behaviour during a downturn is helpful. However, research suggests that consumer spending, budgeting and money management behaviour is not necessarily as uniform as is popularly believed.

Since marketing developed as a discipline some 50 years ago, a central tenant has been to break customers into like groups - and decide which group to focus on. This tenant still applies even more in the case of a downturn, when marketers need to look at the particular distinctive ways of thinking of their primary consumer group, and how they are likely to cope. Marketers would do well to consider their group of interest and how the particular worldview they hold affects their spending habits.

The big picture may mask spending and saving across Australian households

'Debt is out, and saving is in' - but is that really the whole story? Some Australian households are indeed on a savings spree. National accounts data for the December quarter indicates the largest growth in saving since September 1990. Many people are putting their money where their mortgage is, and/or ridding themselves of credit card debt. Reserve Bank (RBA) data statistics in December 2008 recorded the highest monthly credit and charge card repayments ever.

The same RBA report, however, suggests that other Australian households may actually be on a spending spree. Data shows December also having the highest ever dollar spend on credit and charge card purchases and cash advances. This difference clearly suggests that there is more diversity of spending and saving across Australian households than aggregate data would imply.

There are a number of reasons for this phenomenon. Some of the differences can be attributed to household makeup and life stage. Economic gloom and its negative effect on consumer sentiment is less likely to impact people in occupations that are deemed 'recession proof' - teachers and emergency services workers, for example. On the other hand, real estate and financial services are sectors where significant layoffs have already occurred.

Another factor to consider in differing spending and saving habits is the uneven distribution of resources across households. A range of data indicates that there are systemic differences across suburb, with financial crisis hitting the poorest areas first and hardest. The mean taxable income ranges from about $30,000 in the poorest NSW postcode through to about $160,000 in the wealthiest. Home owners in affluent suburbs who are mortgage free and have greater job security are likely to feel less stress. Add the compounding effect of tax cuts, lower petrol prices and interest rate cuts, we see that many employed people are objectively better off now than in recent times.

Worldview and consumer behaviour

While broad consumer purchasing sentiment certainly moves with the economic cycle, underneath lies a set of reasonably stable and systematic differences in consumers' worldviews. These comprise typical modes of thinking and ways of handling the world, together with sense of self and place in the social and economic system.

Several types of worldviews have been found to influence the ways that people approach spending, budgeting and money management. The first dimension ranges from 'living in the moment' through to calculative money planning. The second dimension ranges from 'call for help' through to a deeply ingrained ethic of self-reliance. Calculative money planning is more closely linked with occupational status, than with income. An ethic of self-reliance is more evenly distributed across occupations. Neither dimension is found to be age-related, since they are primarily instilled through childhood socialisation processes. The following research describes extreme ranges of both dimensions.

Calculative money planners: an empowered view of self

Calculative money planning is a particularly ingrained practice amongst those in higher educated professional occupations, a group more likely to cope better during a downturn. This practice stems from an overall view of self that is empowered and confident. People who fall into this group are more likely to see opportunity in the face of threat. They are generally more deliberative problem solvers, are more future oriented and goal directed. They employ more adaptive coping strategies.

These ingrained qualities result in distinctive money management practices. For example, they take more care and put more time into budgeting and monitoring their spending. They know where they stand day-to-day and week-to-week. When it comes to investment, they take a longer term view and are more likely to explore a broader range of investment options.

Despite this practice often occurring in people with higher incomes, this distinct set of attitudes can't be simply attributed to income. For example, differences in worldviews were found when comparing young people (aged in their 20s) in professional and manual working occupations who were earning similar amounts.

The careful budgeting exhibited by calculative money planners does not mean that these people don't lash out and spend luxury and hedonic products - they do. The difference is that these people allocate money to discretionary items (like expensive restaurant meals) through a conscious balance between quality of lifestyle and investing for the future.

Ethic of self-reliance: dismissal of consumption

Akin to a right wing political ideology, the ethic of self-reliance is very much about belief that the individual should remain financially unencumbered and take care of themselves. One way to ensure this is to spend frugally and disavow the culture of consumption that they believe dominates contemporary society.

Unlike a calculative money planner who is careful but creates a balanced life, the purely self-reliant individual achieves their end goal through abstinent living. Another difference is that people adhering to this belief system express is a fear of debt in all circumstances, whereas the calculative planner is ready to borrow if future returns are anticipated.

Coping with a downturn: world view matters

When facing economic stress, consumers look at the problem through the lens of their distinctive world view. People who are high on calculative planning will be best equipped to adapt. They will be less threatened and work to rebalance their thinking towards getting through the short-term difficulties, without completely losing sight of longer term goals. People who seek self-reliance through frugality are likely to be more threatened by a downturn and the prospect of dependence. However, given that their primary strategy relies on frugality, they don't have many options when income declines.

People who are low on both calculative planning and self-reliance are the worst placed to get through a downturn. They feel their world is out of control, and a sense of helplessness is likely to set in as their coping strategies are the least effective of all.

Implications for marketers

While the tendency is for people to tighten their belts during a downturn, there are underlying differences among groups of consumers, either because they are economically stable or because they are better at coping during a downturn. These two factors tend to go together and move with social class. Marketers need to take into consideration the distinctive ways of thinking of their primary consumer group.

Well educated consumers from an upper strata social class tend to have more adaptive and abstract ways of thinking, largely due to education advantages. Marketers need to evaluate whether their group of interest sees a great threat or not, and whether they have the skills and mechanisms to adapt and cope. They aren't likely to change their fundamental worldview dramatically during a downturn. For some, the downturn will have dire effects, but for others, the effects will be minimal and their saving, spending and budgeting habits will remain consistent through a downturn.

Marketers must consider the pockets of diversity in household situations across the nation in addition to the overarching trends in consumer sentiment and spending. Disposable income, uncertainty about the future and ingrained worldview vary across households. Particularly when it comes to developing strategies, marketers need to assess where their customer base sits on these types of variables. By doing so, they will add further depth of understanding to the aggregate generalisations.