“As prices go up, consumers will slow down on discretionary spending, first, before non-discretionary spending,” said Yannick Lefang, Kasi Insight CEO and Founder.
Ever wondered why your business does well sometimes and poorly at others? You may assume that the odds were for or against you at either time. But perhaps you have been ignoring some economic metrics that influence sales. Unknowingly, you may have been playing for or against market odds. Well, it is time you pay more attention to consumer sentiments.
Consumer sentiment refers to how consumers feel about their money when spending in a market. It drives spending, markets, economic cycles, the stock market and company earnings. Analysts measure these sentiments with an index that shows how optimistic consumers are about their finances and economy. The index is a market indicator employed by most strong economies to monitor and influence customer spending habits.
In a recent webinar by Kasi Insight titled Is Inflation Ruining The Party? How can brands stay relevant with rising prices?, analysts Yannick Lefang and Ato Micah discussed how consumer sentiments vary across markets. “As prices go up, consumers will slow down on discretionary spending, first, before non-discretionary spending,” said Yannick Lefang, Kasi Insight CEO and Founder.
Discretionary spending is a non-essential expense carried out to satisfy human wants. Spending in this category includes expensive clothing, holiday trips, recreation, entertainment, luxury cars or gadgets, etc. Consumers can live without them, unlike non-discretionary expenses such as housing, taxes, debt and groceries. We can also call money used for discretionary spending disposable income. For instance, if someone earns $5,000 a month and spends $3000 for non-discretionary (essential) expenses, they would be left with $2000 for discretionary spending.
The impacts of COVID-19 on consumer sentiment
During the pandemic in 2020, there was a sharp drop in consumer spending globally. The uncertainties and fear that trailed the virus outbreak impacted consumers’ disposition toward money, initiating widespread pessimism in many markets. For example, the pandemic caused a significant loss in the global hospitality sector because fearful consumers had no need for hotels, restaurants, or vacations.
According to a report by HotelTechReport, the year-over-year (YoY) decline of seated diners in restaurants worldwide was a staggering 41.36 per cent as of August 23, 2020. The original forecast for the year 2020 was $712 billion in revenue. But the sector recorded a 34.7 per cent decrease in revenue of about $447.4 billion. Invariably, the performance of the hospitality sector is highly dependent on consumer sentiments towards discretionary spending.
Every economy is unique
Every economy has its unique sentiment, and global occurrences like inflation help to show the uniqueness across markets. Despite inflation, people still engage in discretionary spending. Customers in country A may react differently to inflation than customers in country B. This is because the impact of inflation varies across consumer segments and categories.
Between October 2021 and May 2022, Kasi Insight’s Index of Ghana and Ivory Coast economies shows how markets can experience a surge, slump, or redundancy in discretionary spending during inflationary periods differently. For example, the Ghanaian market saw a drop in discretionary spending from 30 percent to 10 percent, amidst a 27.6 percent increase in inflation. Meanwhile, the Ivorian market did not experience a dramatic drop, as more consumers remained indifferent despite a 4.5 percent increase in inflation.
In Nigeria, discretionary spending rebounded faster between 2021 and 2022. Most consumers in the market were optimistic about the economy for several reasons despite surging prices. Therefore, brands innovate toward consumer discretionary spending. Recent economic contractions have shown how consumers can tilt towards varying spending habits. To boost productivity and profitability, brands need to pay more attention to consumer sentiments.
Below is an infographic that captures what happens when brands pay attention to consumer sentiment:
The above infographics show that proper observation of sentiments can help brands get more innovative and gain more market share while staying relevant. Brands should create more options to accommodate disposable incomes- particularly for customers on the fence. According to Ato Micah, an economic expert and Managing Principal at Maverick Research, “customers are more loyal to their pockets than to any brand. Therefore, brands should not stop innovating. Look to what customers are gravitating towards and increase your portfolio.”
Micah noted that “for the African market, consumers are being very careful about how they spend disposable income. 60 per cent of Ghanaians felt cash-strapped in terms of disposable income” during the period under review. This behaviour has translated to switching to more affordable brands, swapping to alternative bands, and squeezing frequency of consumption. Below is an infographic that depicts his argument: