Why Discretionary Spending is Old Hat

I’m endlessly amused by bored sportspeople and jumpy teenagers saying they just can’t wait for the COVID-19 constraints to be over. As if everything will be normal when the pub or the skatepark fully reopens.

The day I return to my favourite restaurant will mark not the end of the disaster but the beginning. We will look back with affection at the lockdown bubble when our only complaint was Wi-Fi speed and the lack of a hug.

I don’t mean to sound heartless. The impact on the families of people who were sick or died has been horrible. But from an epidemiological standpoint, for Australia it’s been a walk in the park.

What lies ahead is not a return to normality but a descent into debilitating recession. Based on the Global Financial Crisis, we're unlikely to see normal unemployment numbers for a decade. And in Australia the GFC wasn’t even a recession.

McKinsey & Company estimates that the COVID recession will produce a 40 to 50 percent drop in discretionary consumer spending.[1] I think that's about right. But what about elective spending? And what's the difference?

As we awake from the COVID coma our language is evolving. Terms like basic needs or essentials will continue to mean the things we can’t live without. However, discretionary spending or consumption is becoming definitionally less relevant as a metric of value and growth potential. Conversely, elective spending is becoming a more relevant and more useful norm.

Discretionary spending is on things and experiences we love, but don’t need. I’d really love artichoke hearts, saffron, foie gras, mud crabs, and truffles in my next shopping basket. But I don’t need any of them. That’s the obvious difference between essential and discretionary

Elective spending, on the other hand, is more nuanced. And more apposite for the post-COVID epoch. It is grounded in essential needs but also is fuelled by desire.

I need, for example, to buy butter. Butter is a basic need or an essential product. But I elect to have butter that tastes incredible, is sustainably made by artisans committed to authenticity, provenance, and flavour. 

So, instead of buying a supermarket's private label butter for $1 per 100G I buy Pepe Saya hand-churned butter for $4.89 per 100G.

Pepe Saya butter, at 4.9 times the cost of its basic alternative, exemplifies the elective consumption ethos of a new economic order of consumers – satisfying basic need but simultaneously also satisfying a desire for something wonderful. And, it’s not in the same universe as discretionary spending on products like truffles and foie gras.

I have narrowed this new economic order down to 24 percent of the population. In other words, there are 5 million of them in Australia and 60 million in the US. And they are not called the new economic order for nothing – Roy Morgan research reveals that, on average, they spend and invest at a rate 3X more than the traditional consumers marketers know so well. 

The data also reveals that the new economic order, let’s abbreviate that to NEO, are more resilient consumers than Australia’s 10 million traditional consumers. And resilient brands need resilient customers.

McKinsey found that during the 2008/9 GFC resilient brands reallocated resources thoughtfully by investing in crucial capabilities such as reading demand signals to determine where and how customers would shift their spending.[2]

During the COVID Financial Crisis, shifts in customer spending are being defined by elective consumption, by the new economic order of consumers who are permanently changing the nature of spending.

What does this mean for marketers in the post-COVID economy?

The first thing is to stop comparing discretionary spending and essential spending as if it's the only metric of record. Of course discretionary spending has dropped. But this relentless comparison leads some marketers to believe that consumers have stopped paying a premium for premium products; that fewer people are engaging in elective spending. And that's just wrong.

The second thing, therefore, is to have a more nuanced view of customers. I'm with Mark Ritson that we need customer segmentation but I don't support those segments being drawn from an entire population or a whole customer database. Look at Millennials - a demographic segmentation that is pointless and wasteful in marketing terms.

Let's unpick the Millennials segment. Australia's two million traditional Millennials don't spend much, are laggard adopters of new technlogy, are under-educated compared to the national average, and earn less than the average Australian.

However, when we look at the 1.6 million NEO-Millennials, they are early adopters of technology, dominate professional roles, are highly educated, earn more, spend more, borrow more, and by every metric have a significantly higher value than (a) all Millennials combined, and (b) traditional Millennials.

So, by all means, model customer segments but use only the high-value customers in the segmentation database, not all customers. This is value-based segmentation or, in the parlance of some marketers, fishing where the fish are.

Third, look for value that is consistent across the economic cycles. For example, according to Roy Morgan data, 91 percent of NEOs are in the top third of elective spenders in the economy. And that 91 percent has remained fairly consistent throughout the economic upheaval caused by the COVID pandemic.

Ritson and Bill Bernbach are right when they say that despite all the predictions of dramatic changes in consumer behaviour after economic slumps, nothing much really changes. Evidence-based consumer value remains consistent despite the economic highs and lows.

Fourth, create premiumisation across categories. Yes, NEOs are shifting their spending - for example, from travel to nesting (home improvements) - but they're not suddenly buying private label butter, or instant coffee, or factory-produced bread, or caged hen's eggs, or knock-off handbags, or Ralph Lauren seconds from a DFO.

Elective spending remains consistent. And delivers higher margins.

So, as the two-speed recovery gains momentum – or rather as its NEO-driven fast lane gathers speed – the new consumer landscape will require a new lens and new metrics. The future appears to be being shaped by a new economic order, and marketers will need to adjust to the new normal.

Dr Ross Honeywill is a social scientist and internationally published author. He advises national and global brands on premium strategies. (ross.honeywill@premium.net.au)

GO TO: www.premium.net.au | www.roymorgan.com

[1] S Smit, M Hirt, K Buehler, S Lund, E Greenberg, & A Govindarajan, Safeguarding our lives and our livelihoods, McKinsey & Company Insights, March 2020.  

[2] B Gregg, A Kim, & J Perrey, Leading with purpose: How marketing and sales leaders can shape the next normal, McKinsey & Company Insights, April 2020.