How to get frugal consumers spending again

For much of the past decade, many Australian businesses have relied on a simple idea to fuel growth – consumers love buying new stuff. But right around the world, there are signs that this is changing as customers adopt a more frugal, conservative attitude.

In the US, there is a growing group of consumers who are no longer turned on by buying new things. While this is partly driven by cost-cutting, many others would simply prefer to spend their money investing in experiences that create lasting memories, rather than purchase yet another pair of designer shoes. And this isn’t just a downturn trend – research has demonstrated that experiences make us happier than goods.

This movement doesn’t bode well for Australian businesses, with many already noticing a change in consumer sentiment as families batten down the hatches and cocoon at home.

Craig James, chief economist, CommSec, recently examined unpublished data from the Australian Bureau of Statistics in the March quarter found that consumers cut back their spending on gambling and air travel, which is consistent with the more conservative behaviour recently adopted by consumers.

“Aussie consumers have been shunning spending on non-essential or discretionary items in response to constant interest rate hikes from the Reserve Bank. While the ‘new conservatism’ exercised by consumers is positive from a big picture standpoint, it certainly isn’t a trend that has been applauded by consumer-focussed businesses such as retailers and airlines,” the report says.

But what will this trend mean for Australian retailers? And what can they do to get these new conservatives opening their wallets again?

How spending is changing

The change in consumer behaviour is driven home by the Bureau of Statistics’ latest retail trade figures, which showed retail sales grew by a dismal 0.7% in July.

Russel Zimmerman, deputy executive director, ARA, says one of the first areas of retail to be hit when spending declines is cafes, restaurants and takeaways, as people cut costs by cooking at home.

There is also anecdotal evidence to show more families are cocooning at home, killing time by watching movies or playing board games.

The stay at home phenomenon has also been keenly noted by toy manufacturer Mattel, which has seen a resurgence in the popularity of iconic board games, such as Scrabble and Pictionary.

“We’ve seen an increase in Gen X and Gen Y-ers loving the traditional board game, together with friends and family,” the company’s marketing manager Meagan Reay says.

Of course, while this has had a devastating effect on some businesses, for others it has been nirvana.

For example, Australians appear to have cushioned the blow of the economic downturn with chocolate, which is a sweet victory for Cadbury. The brand was named the most popular grocery brand in Australia, in The Nielsen Company’s Top 100 Brands report, released earlier this year.

Is discounting the answer?

Whether their reluctance to spend can be attributed to the recent global financial crisis, the instability in the Australian political scene or a complete shift in consumer thinking, it’s up to businesses to work out a way to turn these consumers on to spending again.

But companies are realising that attracting conservative spenders isn’t easy, and retailers need to dramatically change their approach if they’re to stay in the game, according to retail brand specialist Stephen Rinaldo.

“The first piece of advice for retailers is to get to know your customer well. Retailers, first and foremost, need to know exactly who their customer is and what they want.”

Rinaldo, who works with retail start-ups and existing retailers to help them step up their image and take their business to the next level, counts Optus Retail, Myer, Kmart and BMW among his clients.

He says retailers shouldn’t be tempted to fall into the discounting cycle in a bid to encourage sales. Discounting diminishes the perceived value of the item, which in turn undermines marketing activity.

“It’s okay to discount if you’re a high volume, low margin business model (such as Costco or The Reject Shop). For all other retailers with high margin items, the last thing they should do is go down the discount path. There’s more at stake than profit margins; customer loyalty is also at risk, and repeat profits.”

Add value to the purchase

One answer to falling sales from conservative spenders lies in value-adding.

Rinaldo says value-adding as opposed to looking at what value they can subtract – will win over conservative spenders.

Giving away a gift with purchase or improving the shopping experience should be considered, because conservative spenders love getting something for nothing, he says.

“Adding value is a far more effective means of encouraging customers into the store and retaining their loyalty.”

This theory works for Rolf Krecklenberg, managing director of online retailer oo.com.au, who offers free delivery on bulk purchases.

“We’ve noticed that people will often buy more than one product to be able to get free delivery. These conservative spenders calculate the value and know that for less than the cost of highway tolls, they can have the items delivered to their door.”

The conservative shop online

This shift toward more conservative spending could work in favour for online retailers.
Currently, online sales represent 3% of retail spending in Australia, but this sector is expected to grow by 40% by 2010, according to Forrester Research, which forecast that in 2010, Australians will spend $32 billion online, up from $23 billion in 2008.

Krecklenberg says online retail offers far more transparent pricing, which is a huge turn on for conservative consumers. Price is important to this sector, and online shopping enables them to compare prices of goods online at the click of a button.

“Pricing has never been more transparent than it is right now. And the online players are often far more competitive with their pricing that traditional retailers,” he says.

Homewares and electronics are among the biggest growth sectors, which supports those who believe that people are continuing to cocoon in their homes, according to Krecklenberg.

“Traditional retailers say it’s tough out there, and that people are more conservative about their spending, but there’s a complete shift in consumer behaviour. They’re shifting to online, which is why we’re giving traditional retailers a real run for their money.”

The frugal customer trend is even helping some online businesses get established. For example, take websites such as JumpOnIt (launched in May) and Cudo (launched in September) which sell discounted “experiences”, such as travel, spa treatments, fine dining or yoga classes.

While there are different models at play here – Cudo uses the group-buying model, whereby a discount is only activated when a certain number of the community members buy in, where as other sides use a straight discount coupon model – these sites are proving a bit hit with conservative customers.

Reconsider your marketing

A more considered approach to marketing is also important for those looking to attract consumers unwilling to loosen their purse strings.

Krecklenberg says online retailers need to communicate with its database regularly to maintain traffic levels to their site.

“We also have banner advertising and encourage a high level of product reviews on our site, which works for us,” he says.

A recent study has also highlighted the need for Australian retailers to invest in increasingly sophisticated and broad marketing strategies to prise cash from their customers.

The study, Shopper Marketing: The Journey Begins, conducted by the Global Association for Marketing, found that so-called “shopper marketing” tactics are being used by about a third of retailers.

These strategies are designed to go well beyond point-of-sale marketing and in-store promotion, and include elements such as in-store media and theatre, digital and electronic displays, transit media, websites, social media, more effective in-store lighting and more interactive sampling/demonstrations.

The key to these strategies is keeping the shopper in-store and engaged, to give retailers the best chance at convincing them to spend.