Fical

foreseechange indicators of consumer activity and lifestyle

Charlie Nelson
director, foreseechange
21 January 2002

For several years, my research has shown that consumer confidence/sentiment indexes have no predictive power so far as consumer spending is concerned.  My view was reported in the Australian Financial Review of 20 February 2001 (page 29) “Once we allow for interest rate movements, consumer confidence measures contain no information about the future of consumer spending.”

Now, the Reserve Bank has come to the same conclusion “there is little evidence that the surveys tell us anything we didn’t already know”.  The paper “What do sentiment surveys measure” by Roberts and Simon of the Reserve Bank of Australia confirms my own conclusions.

In 1993, I set out to develop a better set of measures to guide forecasters and business strategists about consumer plans and disposition.  That was the genesis of fical.  The measures developed have proved their predictive validity and strategic value, as shown below. 

Concepts and Intentions Measured

The first measures, started in 1993, captured marginal propensity to spend, save, and repay debt.  This provides the “willingness” to spend.  In 1996, I added a financial wellbeing measure to quantify the proportion of people who had discretionary funds, or money left over after meeting their commitments.  This provides the “ability” to spend.

Combining the ability and willingness to spend measures yield spending disposition segments: 

• Frugal Spenders, who have neither the ability or willingness;
• Frustrated Spenders, who have the willingness but not the ability;
• Reluctant Spenders, who have the ability but not the willingness; and
• Profligate Spenders, who have both the ability and the willingness to spend.

Other measures collected include: 

• Borrowing intentions;
• Intentions to cut back on spending;
• Relative importance of factors such as convenience, price, service, quality, etc. when shopping;

New measures are added from time to time, such as preferred asset mix for superannuation.

Other segmentation bases have been developed, including saving disposition segments and price sensitivity segments. 

Predictive Validity

The size of the Profligate Spender segment, which has varied between 18% and 23%, is strongly correlated with retail spending growth one quarter later.  That is, changes in the size of the Profligate Spender segment provide a good prediction of retail sales growth in the next quarter.  The correlation is statistically significant and quite large, 0.64.

The chart bellows illustrates this.  Retail turnover annual % growth is shown with the annual difference in the size of the Profligate Spender segment lagged by one quarter.  This measure suggests a slowing in retail spending growth in the first quarter of 2002. 

Strategic Insights

This research program has shown that consumers change their priorities from time to time, according to economic circumstances.  It has also shown that different segments of the population have very different priorities.

For example, one segment of the population (17.7% of adults) prefers interest rates to be higher rather than lower – these are mainly older people, including pensioners and self-funded retirees – and this is a rapidly growing segment.

Another example is price sensitivity that clearly varies with economic conditions, falling to relatively low levels in 1999.  This fall in price sensitivity coincided with a fall in share of generic products in supermarkets and contributed to the demise of Franklins.  This variation provides opportunity to shift the communications focus between price and other benefits dynamically.

The fical measures allow marketers to adapt their strategy for different market segments and for different economic circumstances. 

Further Information

Click here to see more of these measures.

For further information on these measures, contact Charlie Nelson on (03) 9386 4841.

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