Consumers still riding the high 'discretionary spending' wave
South African consumers seem to be in a buoyant mood, despite interest rate hikes and increases in fuel prices, confidence levels of retailers remained high in the second quarter of this year.
This is the view of Derek Engelbrecht, Retail and Consumer Products Director at Ernst & Young Inc who attributes this spending spree to a lack of a 'saving' culture within South African consumers and an in increase in autonomous consumption (spending fuelled by credit).
"Consumers seem undeterred by the increase in prices and are continuing to spend. It can also be argued that either the rich are less sensitive or the poor are indifferent to these increases. Unlike our Japanese counterparts, who are renowned for their astounding saving abilities; we do not have a strong culture of saving and this gives the wrong impression that consumers have a large disposable income. This means that very little gets saved for retirement," Engelbrecht says.
He notes that this autonomous consumption' phenomenon has been exacerbated by the increase of non-traditional credit card issuers who are creating a 'culture of spending' by launching initiatives such as offering consumers points for using their credit cards to purchase goods or being entered into competitions. "This is cemented by recent media reports that claim these non-traditional card issuers have uncovered a rich seam of clients who have warmed to the lifestyle benefits they offer," he says.
Engelbrecht asserts that due to the previous careless lending and aggressive marketing of credit cards by some issuers, an artificial demand for credit has been created which in turn has stimulated discretionary spending. "Recently implemented regulations such as the National Credit Act (NCA), which regulates financial institutions and encourages responsible lending, will deflate this artificial stimulation in the long run. In some sectors, regulation seems to be making an impact such as the motor vehicle sector which is experiencing a decline in sales due to the stringent checks that are being implemented by credit facilitators when processing finance applications," he notes.
Meanwhile, Ernst & Young's UK Annual Discretionary Income study, launched in June, reveals that UK consumer spending power continues to decline. The average UK household now has a lower proportion of its monthly income to spend on discretionary purchases than at any time in the last five years after tax contributions, mortgage payments and monthly household bills, the average family now has just over 22% of its gross income left over as opposed to over 28% in 2003.
"This might be similar to the South African context, but the new entrants into the market, think Black Diamonds, are probably offsetting this trend. In addition, the recent acceleration in job creation will also continue to limit the impact," says Engelbrecht.
"Five years ago consumers were more cautious and conservative. This has since been replaced by optimism and consumers are spending more on goods, more so on luxury goods. Most of this purchasing power has been attributed to the rise of the black middle class who are targeted by marketers as purchasers of luxury goods," he says.
He concludes, "Luxury goods have become more accessible to consumers whether from the broader market or from the niche markets thanks to an increase in their income or wealth. It has led to the 'trading up' phenomenon, when consumers have the disposable income available to swap an existing product line or lifestyle for one that is perceived to be more luxurious".
