For business, no win-win as Irish consumers push back against price increases

For business, no win-win as Irish consumers push back against price increases

The personal sector is a significant component of the Irish economy and its consumption behaviour has a big effect: If the consumer is not spending, then the economy will not perform and jobs will be lost.

Consumer behaviour is driven by real economic and financial developments, but also by psychology.

If people feel cautious about the future, then spending will suffer.

A turn in sentiment could take up to six months to translate into changed spending behaviour — either to spend less or to spend more.

The behaviour and mindsets of the Irish consumer are interesting at the moment.

While the economy has undergone a decent recovery, most consumer-facing businesses are still in challenging times.

Employment, disposable incomes, and earnings growth are all evolving positively, but consumer confidence has, nonetheless, flatlined in recent years, and has been under some pressure over the past nine months or so.

Weak consumer sentiment is most likely due to a combination of flat wages (which endured over many years after the crash); the tax burden increasing significantly due to the crash; and because housing costs have soaked up an increasing level of household expenditure, particularly for a certain age segment of the population.

And, of course, Brexit is justifiably engendering a heightened level of nervousness.

The upshot of all of these factors is that consumer-facing businesses are dealing with households that are resisting higher prices.

Businesses’ retail pricing power is limited.

This is not to suggest that consumer spending is not growing. It is growing, but it is still facing a challenging environment.

In the first four months of the year, the volume of retail sales — which is spending on physical goods and which accounts for around 40% of total consumer spending — increased by 3.2%, but the value of those sales increased by just 2.4%.

Car sales are a particularly weak component of retail sales, and when they are excluded, the volume of retail sales expanded by a stronger 5.8%, but the value of those sales grew by a more sedate 4.3%.

The gap between volume growth and value growth is a challenge for retailers and shows that consumers are insisting on value for money.

Car sales have been interesting over the past couple of years and tell us a lot about consumer behaviour.

For business, no win-win as Irish consumers push back against price increases

In the year to the end of May, new car sales dropped by 7.5%, while used-car imports increased by 3.1%.

This has been the trend over the past couple of years and while a weak sterling is a factor, the overriding conclusion is that stretched consumers are increasingly searching out value for money.

Bringing in a used car from the UK satisfies this requirement.

Market researchers have also been very instructive.

Their tracking of the market share in retail grocery is particularly interesting.

The headline story is the growth of the so-called discounters, Aldi and Lidl.

The discounters controlled a very small share of the Irish retail grocery market in 2009, but, a decade later, their combined share has jumped to well over 20%.

The fundamental structural change in this market is also totally consistent with the story of the consumer seeking out value for money.

For business, no win-win as Irish consumers push back against price increases

The evolving strategy of the grocery discounters is interesting.

In the past, their product range was dominated by own-brand products, but they are now moving strongly into the branded range.

The strategy is clearly working.

There is a perception that the discounters are significantly cheaper across a wide range of grocery items.

However, anecdotal evidence suggests that this is not necessarily the case in any significant way for branded products.

Perception is still king, however.

The discounters are changing the retail grocery landscape and some of the longer established retailers in Ireland are being forced to react.

This may be good for the consumer in the short-term, but spare a thought for the poor food producers.

A win-win scenario is rare in business.

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