It certainly seems like something is rotten in the state of the global economy. Global aggregate demand is subdued as the excessive debt-fuelled capacity of the 2000s is slowly burnt off. In the US, Barack Obama’s perennial talk of green shoots throughout his tumultuous Presidency has failed to inspire confidence, while its clear the Federal Reserve printing press serves only the wealthy. QE2 has raised asset prices and created wealth, but with hot-money flowing to the developing world and commodity markets, the consequential imported inflation to the US (petrol, food, energy) is increasing wealth disparity and causing civil unrest – exemplified by the Occupy Wall Street protest movement.
Meanwhile, the political quagmire in the Eurozone continues – to what extent technocratic governments in Greece and Italy can avoid the downward debt spiral is unclear. The risk of contagion to the core northern nations remains, and with it the collapse of the European banking system.
Populist, nationalistic ferver continues to grow in France were Presidential elections this year could terminate the Merkel-Sarkozy (Merkozy) accord.
Closer to home, growth in China is slowing as it attempts to transform its reliance from exporting to internal consumption. In Australia, we are experiencing a once-in-a-generation resources boom with unprecedented capital investment to the mining sector. Yet a so-called two-speed economy and Reserve Bank of Australia holding pattern – the official cash interest rate was lowered twice in November and December 2011 but left un-changed in February 2012 – suggests the outlook is unclear.
Yet in and amongst all this uncertainty – the new norm for 2012 – there are five real, transformative and structural threats all fashion retailers in Australia must contemplate.
One: household saving and consumer spending habits have changed.
To understand this threat to fashion retailers, its necessary to take a look back at household saving and consumer spending habits over the past 30 years. The aggregate household saving ratio as a percentage of disposable income is currently at a 30-year high [Fig 1]. In 1981, the aggregate household saving ratio as a percentage of disposable income was over 20 per cent. In the 20-odd years from 1981 to 2003 the household saving rate steadfastly declined to a low of around seven per cent in 2003. From that low in the early 2000s households have been slowly returning to more traditional norms of saving and borrowing – and the Global Financial Crisis accelerated this return to savings posture.
In a similar vein, mortgage debt levels are at a 30-year high [Fig 2]. In 1984, mortgage repayments accounted for less than 13 per cent of total household expenditure. Today, mortgage repayments account for 18 per cent of household expenditure. This is the largest change in any household expenditure category and reflects the rise in interest payments on mortgage debt due to higher levels of debt relative to income.
Of what disposable household income remains, consumers now prefer to spend on experiences like overseas travel, according to Philip Lowe, Assistant Governor (Economic) Reserve Bank Australia: “there has been a gradual shift in household preferences away from goods and towards ‘experiences’. This would be consistent with the strong growth in spending on recreational activities that has occurred over recent times.”
It’s clear this preference to spend on experiences has been at the expense of clothing, footwear, household equipment and furniture, which spending has steadily declined over the last 30 years. In 1984, spending on clothing, footwear, household equipment and furniture totalled 14 per cent of total household expenditure. Today, this spending equals only eight per cent of total household expenditure. Compared to 1984, households now prefer to spend on: recreational services (e.g. pay TV, mobile phone, internet); overseas holidays (brought about by rising incomes, appreciation of exchange rate, and emergence of low-cost airlines); education; and personal services (e.g. gym memberships).
Two: consumers now access information online via high-speed, high-bandwidth broadband connections and use this information to make purchasing decisions.
Communication is now digital, and the requisite shift in posture presents major challenges for fashion retailers. The 2000s saw an unprecedented surge in uptake of internet connections at the home. Between 1998 and 2009, household access to the internet at home increased over 400 per cent. In 1998, 1.1 million or 16 per cent of all Australian households were connected to the internet at home. By 2009, 5.9 million or 72 per cent of Australian households were connected to the internet.
In the later years of that timeframe, the capacity and speed of the network itself shifted considerably. Between 2004 and 2009 preference shifted from dial-up connections to broadband [Fig 3] – offering users connection speeds five times that of original dial-up connections. In 2004-2005, there were twice as many dial-up connections compared to broadband connections in the home but by 2009 broadband penetration in the home far exceeded dial-up.
This increase in network speed and capacity is only set to increase as the National Broadband Network (NBN) is progressively implemented across Australia over the next decade. With fibre-to-the-premises connectivity to 93 per cent of Australian homes offering connection speeds of up to one gigabit per second, the NBN represents a major milestone in Australian digital communications. At present, time spent online is high, regardless of age [Fig 4]. Of all users, young people aged 15 to 24 spend the most time online each week. After that, women aged 35 to 44 and women aged 55+ are the next biggest users.
Access to information via the web gives consumers unprecedented knowledge – and by extension power – to make better purchasing decisions. Prior to the web, a customer would make a purchasing decision by: physically visiting shops; consulting catalogues; giving consideration to influence of print, television and radio advertising; and considering word-of -mouth recommendations. In this scenario the customer obtains an incomplete picture, slowly and at high search cost and the customers can never become fully informed off all their options.
Today, customers make a purchasing decision by: searching for information using Google search engine; reviewing product review websites or product blogs; comparing price on price comparison websites (e.g. Shopbot, GetPrice, MyShopping); researching reputation of brand/s; and considering word-of-mouth recommendations from friends and high influencers (bloggers) on social media services like Facebook, Twitter and Tumblr. The information is obtained instantly with maximum flexibility and accessibly (home/workplace), conveniently (any time of day) and at reduced search cost. The customer is completely aware of all purchasing variables, allowing for a more perfect purchasing decision.
As a result, Google is a customer’s gateway to purchase: 57 per cent of internet users search the web every day; 46 per cent of daily web searches are for products or services; 70 per cent of the links users click on are organic (not paid); and 60 per cent of all organic clicks go to the top three organic search results. Consumers now expect brands to appear in search results when they use specific keywords to search for a product or service. If a brand does not appear in results it changes their perception of the brand adversely: consumers question the brand’s reputation and its ability to provide valued solutions.
Three: consumer transactions are shifting online.
Consumers now trust e-commerce and the vast majority of Australian internet users have shopped online. For any fashion retailer not yet considering e-commerce, 2012 is the year to act. In 2008-09, eight million people used the internet to purchase goods or services – 64 per cent of the 12.6 million people who accessed the internet. That same year, of the estimated 4.6 million people who did not use the internet to purchase goods or services only 18 per cent did so because of a preference for shopping in person. By 2011 e-commerce adoption was so prevalent that 97 per cent of Australian internet users had shopped online at some point in time.
E-commerce adoption amounts to a structural shift in the economy and the mode of commerce. Online retail sales in Australia totalled $24 billion in 2009, with an average total expenditure across consumers of $1,223 in the second half of 2009. Nielsen estimate that Australian online retail sales will reach $30.2 billion by the end of this year and $37.7 billion by 2013 (amounting to 12.2 per cent growth).
Mobile commerce is exploding and will disrupt the marketplace even further. In that same Nielsen study, as at 2011 mobile payments are growing at a staggering 430 per cent year-on-year. Some 1000 mobile transaction take place every hour in Australia, and 34 per cent with internet enabled phones have purchased a product using this device.
It’s clear: consumers seek value and convenience and this preference has shifted sentiment in favour of e-commerce. Online, consumers avoid crowds and queueing and access a wider range of products for the least available price. As a result, hallmark international e-commerce and transactional brands like PayPal, Amazon and Visa represent trust.
Four: consumers now ignore traditional advertising and marketing.
In line with the digital communication transformation, the impact of traditional marketing avenues is evaporating. According to Nielsen: only 18 per cent of TV ads generate positive return-on-investment; fully 90 per cent of people skip TV ads; and only 14 per cent of people trust advertisements.
Five: consumers rely on media consumed and shared socially online to form opinions about brands and products.
Use of social networks is surging – social networking is undertaken by 73 per cent of online Australians – and as a result social media engagement is changing marketing permanently. Even traditional digital marketing initiatives like electronic direct mail may be proved otious by the rising wave of social media: between 2009 and 2010, the share of online time spent social networking increased 26 per cent while the share of time online spent emailing decreased 42 per cent.
Control over brand communication is challenging on social media, as these technology platforms present more customer touch-points and more avenues for content and communications distribution. Similarly, the landscape itself is in a state of perpetual change – while Facebook, Twitter and latterly LinkedIn are household names with their broad-based appeal, new interest-based social networks like Pinterest and Instagram are popular too. Indeed, Pinterest – which provides users with a virtual pinboard – crossed 10 million monthly unique users in the US in January 2012 according to comScore, the fastest site ever to achieve eight digit monthly unique users. While all of these platforms provide varied services to users, there’s one constant theme – everyone can now create media about your brand and share it effortlessly, whether positive or negative.
Understanding Facebook is key to this new marketing mindset: one in every eight minutes spent online is spent on Facebook; and the platform boasts 10.5 million users in Australia – roughly half the Australian population. Video content is increasingly the digital communication medium.
Online video in Australia receives tremendous viewership: 10.3 million unique views per month; 940 million online videos; 89 videos per viewer per month; and 7.5 hours per viewer per month. Used correctly, video content is incredibly powerful online: it’s easily shared on social networks: it’s easily distributed via Youtube and Vimeo onto blogs and new media websites; and it streams directly into the news feed of fans when posted to a Facebook page.