The reluctant shopper

Bargain hunters: Shoppers love a sale but retailers must discount judiciously.

It’s never been more difficult to get consumers to part with their cash – despite near-full employment and rising wages.

“Frugality is the new black,” says PwC’s retail leader, Stuart Harker. “Everyone got frightened during the near recession and started to save at faster levels than we’ve ever seen in Australia before.”

Consumers have become conservative since the financial crisis and are squirrelling away their hard-earned cash with greater alacrity than ever.

Household savings are tipped to reach $694 billion by 2015, with more than $238 billion of new savings expected in the next five years, Datamonitor research shows.

And Datamonitor analyst Harry Senlitonga says that won’t change until mortgage-payers start to see interest rates recede and until there is generally felt to be greater certainty about the state of the economy. This means retailers have to be more creative in finding ways to get dollars from consumers’ wallets.

Experts say consumers haven’t stopped buying, it’s just that their spending patterns have changed.

Retailers that haven’t discovered this shift are feeling the pain. Woolworths and Myer are two examples of this, both having recently slash their profit forecasts for this financial year because of reluctant shoppers. At Myer, chief executive Bernie Brookes says there had been a 7 per cent fall in foot traffic during January – normally the retailer’s second busiest month.

Consumers, having tightened their belts during the downturn, are now conditioned to searching for value. Private labels are booming and their presence on the store shelves has tripled in the past six years and have provided a buffer for retailers such as Coles which has five levels of generic brands. Mark Ritson, associate professor of marketing at Melbourne Business School, says in addition, private labels give retailers more leverage with their suppliers.

“One of the big advantages of private labels among many is that it takes up more of the shelf space, allowing you to squeeze the remaining suppliers for larger discounts,” Ritson says.

The problem for many retailers seeking to attract the value-conscious consumer is that they have got into the habit of discounting to get them into the store. This has left consumers reluctant to pay full price for anything and experts are unsure to what extent retailers will be able to pull back from this.

“There’s research out there that shows very definitely at a product category level that consumers learn to expect discounts if they’ve received them before,” says professor of marketing at the University of Sydney, Charles Areni. “If marketers continue to rely solely on discounts, it’s a reasonable bet that more of these expectations will hit more product categories.”

Discounting can work but retailers have to make sure they discount on the right products and that they make it up on other purchases.

Shoppers visiting Kmart’s bi-annual toy sale will make an enormous number of unplanned purchases. As much as 70¢ of every dollar spent is on impulse purchases.

The other tactic is to have products at the top end of the market where consumers are still buying.

“Consumers are bargain hunting but every so often you’ll come across a product category where premium brands, incredibly indulgent ice cream or top of the line coffee, are doing well,” Areni says.

PwC’s Harker points to Italian luxury fashion group Prada’s 31 per cent rise in global sales in 2010 as a point in case. “You’ll have a lawyer that shops at Aldi and buys private label [home brand products] who also drives a Ferrari,” Harker says. “It’s all about value.”

The trick here is for retailers to position their products, whether goods or services, as rewards.

They also have to make the store concept, service and product presentation more exciting.

Harker points to London department store Selfridge’s new 35,000 square foot shoe department as an example of the experiential shopping that consumers have come to expect.

“It’s out of this world. They’re enticing the consumer to spend money,” he says.

Myer is attempting something similar with its new Melbourne store, which includes restaurants and a light, modern layout.

The worst place for retailers is to be caught in the middle: neither cheap enough nor rewarding enough to catch the consumer’s eye.

BRW

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