WHILE listening to a recent presentation by Absa’s equity analyst Samantha Naicker titled “Navigating the maze” on South African food producers, I stumbled on a theory dubbed “the lipstick effect”. As defined by Wikipedia, it is when, facing an economic crisis, consumers will be more willing to buy less costly luxury goods but will continue to spend money on small indulgences. Thus, when consumers’ trust in the economy is dwindling, they will buy goods that will have less impact on their available funds but will still make them feel good about themselves and life in general.
Despite the easing of the lockdown, the Covid-19 crisis did not lead to “the lipstick effect” witnessed in past eras. The theory that consumers will spend more on less costly luxury items that will make them feel better about themselves seemingly failed – well, at least when it comes to lipstick.
Circumstances greater than the crisis resulted in a different behaviour from consumers than anticipated. They opted for spending money on home improvements and home entertainment, rather than on luxury feel-better goods, such as make-up and perfume. The home environment became the primary focus of spending and “necessary” for survival. Based on Absa card-spending data, the trend continues, while a return to the “normal” pre-Covid world of work, travel and social interaction remains elusively out of reach.
This got me thinking further about the drivers of consumer behaviour and how the pandemic accelerated online and omni-channel retail beyond expectations. If we look at our data, it is clear that while e-commerce was starting to gather some traction, the lockdown was the catalyst for a step-change in adoption. While foot traffic in malls is starting to pick up, there’s a clear increase in the number of people whose behaviour has shifted to online.
JSE-listed retailers such as Mr Price have reported significant traction in their online offerings, with a 64.1% increase in online sales for the 53 weeks to April 3. The group was processing an order every 58 seconds – a doubling of the rate before the lockdown. This trend was consistent across the board, as Makro saw a 40% increase in online sales last year, while Game was up 77% and Builders Warehouse rose 111%.
Considering all of the aforementioned, it is noticeable that consumers are effectively the ultimate drivers of trends and change. Given that the South African economy (and many economies globally) face a number of big, structural challenges, for which we require such change, it is becoming clear that we will need to start thinking differently about how we influence behavioural changes to drive consumer adoption of necessary trends, technologies and industries for much-needed future growth.
“Buy local” initiative
One of the long-standing criticisms of the government is that it has failed to identify strategic sectors and industries to support and capacitate. We often tried to be all things to all people and failed to identify sectors in we could excel or those that were important in the local economy in terms of job creation or export revenue potential.
Over the past few years, there has been a focus on establishing sectoral master plans with a combination of tax and financial incentives to attract foreign investors. There have been some notable successes, such as the automotive sector. We have recognised the need to move from an import economy back to a self-producing and export-driven economy in order to create jobs and thrive, and the likes of Ford have committed significant investment in their local supply chain.
As an example, the increased focus on the textile sector and related master plan has the potential to bring manufacturing back to South Africa, and also supports small-scale farmers and fabric producers, artists and creatives. However, we keep coming back to the question: “How do we incentivise South Africans to support their local talent and buy local produce?”
A number of the retailers run initiatives – often in conjunction with the likes of Discovery – where you get rebates for buying healthy food and gear. Could the same principle be applied to buying locally manufactured products, and how would consumers respond to this?
From Absa’s consumer merchant spending analytics, it is clear that the clothing industry took extra strain during Covid-19, putting even more pressure on the already struggling textile industry.
Could initiatives be considered that actively drive a “buying local” trend, by putting money back into the consumers’ pockets when it is so desperately needed? Perhaps there could be reduced tax (VAT) or discounts passed via corporate tax for buying locally made produce. This is the sort of thinking we need to adopt to create the positive change we so much require in this economy.
Reducing physical cash as payment mechanism
Cash comes with risk, and risk comes with additional costs. Ideally, we would like to significantly reduce cash in our payment systems, but in an economy such as South Africa’s, cash is still a major part of the day-to-day payment system. Covid-19 has raised further concerns around the risks associated with handling cash and even the passing of card terminals between consumers and merchants.
Fintech player Yoco saw a sharp rise in the number of its merchants who were implementing cashless solutions. At the start of lockdown, 8% of Yoco merchants did not accept cash, and less than three months in, this was at 32%, and it continued to rise over the course of 2020. It is currently at just under 40%.
So how do we influence a change in consumer behaviour to demand payment other than cash? Again, have we thought about incentivising consumers with discounts to pay with means other than cash? Have we (banks) driven alternative payment mechanisms and innovation effectively, making it viable for retailers to adopt strategies to reduce cash? There is no doubt a saving to be made in doing away with security and cash deposit fees that potentially could be passed on to consumers.
In theory, the idea is great and would make stores run more efficiently, reduce security risks and probably lower other cash-related costs such as insurance.
Netflix: the stick or the carrot?
Before I end, I would be remiss not to discuss the stick-versus-carrot approach and what it brings out in consumers. For those who are old enough to remember, you used to have to pay a licence to have a bicycle or own a dog. These were eventually canned, and, interestingly, both the leisure sector and the pet-care sector have exploded as major retail categories.
Over the past decade, the SABC has bemoaned the lack of compliance with paying TV licences as consumers have shifted away from cable to online streaming options. The response from the government and the regulators is to attempt to use the stick of applying “TV” licences for viewing the likes of Netflix. In my humble opinion, sticks rarely work in driving new trends or the adoption of behaviour we would like to see – quite the opposite.
I don’t have all the answers, but I think the events of 2020 have shown that if we can find ways to positively influence and drive change in consumer behaviours, we potentially have the ability to re-imagine our economy.
Isana Cordier is the head of consumer goods and services at Absa Corporate and Investment Banking.
*The views expressed here are not necessarily those of IOL or of title sites
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