Can it possibly true that the shining beacon of Western economic growth (apart from financial services) is losing its shine? Household consumption accounted for 59%[1] of economic expenditure in 2021 according to the ONS. With inflation running at 9.0% in April 2022[2], the Bank of England now expects price growth to peak at 10% in the last quarter of the year. With some forecasts suggesting household expenditure to rise by around 5% this year, this means a real terms reduction in consumption. That’s enough of data for now, let’s read why fading consumerism is a wake-up call to retailers and manufacturers.
Consumerism itself
It is around 100 years since consumerism became commonplace in the USA. No longer are human beings simply consuming the necessities of life such as food, water and shelter. Rather than working to survive and living a frugal life, something changed after WWI. In the USA in particular, these were boom years and there were opportunities to make more than a basic living. With further momentum behind the movement after WWII, economic and population growth unlocked greater economic fortunes. The promotion and pursuit of a capitalist economic model imbued a message that consumption of goods increases your quality of life and happiness. Given the erosion of quality of life during the wars, there was a vast opportunity for growth. However, consumerism by definition depends on continuous stimulation of demand. In short, it needs people to constantly believe that their lives can be better and creates an insatiable need for consumption.
Fading consumerism trends
Here are 10 trends to suggest that consumerism is on the wane. These include:
- Underlying doubts that capitalism (particularly since the financial crisis) is the preeminent economic model;
- A linked concern over inertia in democracies (reference the inexorable growth of China – an autocratic model);
- A surge in household consumption during the COVID-19 pandemic failed to boost our happiness during difficult times;
- Increasing demand for experiences over physical goods, particularly for millennials and Gen-Z as well as baby boomer retirees;
- Surging inflation is eating into the excess income that households have to spend on consumption above the necessities of life;
- Rising interest rates increase the cost of borrowing, including mortgages, thus reducing the amount of surplus disposable income;
- The great resignation suggests that people are struggling to find fulfilment in many jobs and many are prepared to swop income for quality of life;
- Awareness of climate change and environmental destruction is influencing more sustainable choices, old for new and lower conspicuous consumption;
- War, suffering and deprivation in Ukraine makes people more aware of their own ‘frivolous’ or conspicuous consumption and increases charity donations;
- Concerns over the ethical stance of certain countries on climate, war and democracy leading to a reduction in demand for products manufactured there.
A wake-up call to retailers and manufacturers
Following a surge in consumption during the pandemic, many companies are now experiencing a slump. In some cases, businesses have scaled up capacity to such an extent that it is now hard to dismantle the extra capacity. In other cases, shareholders are demanding the same level of revenue, dividends and share price growth seen during the pandemic. After all, how many CEOs do we think acknowledged that all of the increase was due to the pandemic? Add to this supply chain disruption, the great resignation and now war in Ukraine creating a surge in prices and the headaches are multiplying. Crucially, what if the baseline is actually becoming lower than before the pandemic?
According to the ONS, mean household disposable income (adjusted for CPI) ended 2020/21 almost flat[2] on the level of 2007/08 at the onset of the financial crisis. However, with changing attitudes and inflation predicted to hit 10%, there is a real possibility that not only will mean household disposable income fall below that of before the credit crunch but that consumer spending will also slump as 2022 unfolds.
Counteracting fading consumerism
It is worth reiterating the famous phrase of Theodore Levitt. There is no such thing as a growth industry, only businesses that organise themselves to capitalise on growth opportunities. So, unless you happen to be dealing in some of the commodities that have seen a surge in prices (BP and Shell, we are looking at you), your growth opportunities may have recently shifted. At a macro-economic level, we have growing disparity between high earners and the majority. We also have pressures on household income at levels not seen since 1992 at 6.2% as of March 2022. Given that the luxury goods market is projected to grow at a 2.5-5% CAGR up to 2025, this is one strategic choice you could consider. Simply doing what you have always done and hoping for a better return could be a mistake.
Strategies to counteract fading consumerism
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[1] Commons Library Research Briefing – Components of GDP: Key Economic Indicators published 13th July 2022