Cautious spending, a legacy of the pandemic, could sink the consumer-driven economy

By Genshen L. Espedido

Purchasing decisions were easy enough during the lockdown, with most people stripping down to essentials only like groceries. There was some wiggle room on utilities and rent because of grace periods ordered by the government. But looking forward, the question on many business owners’ minds is whether consumer confidence will ever return with the economy’s prospects remaining clouded.

In a paper, Consumer Fear in a Post-Quarantine Economy, University of Asia and the Pacific (UA&P) economists George N. Manzano and Nikka C. Pesa said fear of infection will cause consumers to forego many transactions to avoid having to go out and risk contact with others.

“Because reliable information is absent or hard to come by, everyone will suspect that the person — co-worker, client, service provider, etc — could be a potential carrier. Given the perceived risk, (consumers) will forego the transaction leading to a loss of potential business,” they said.

Luis F. Dumlao, Dean of the Ateneo de Manila University School of Management, said that the most significant change in consumer behavior during the coronavirus pandemic is the “overall reduction of aggregate consumption.”

“It is not that consumers are reprioritizing as if their behavior change is by choice, but it is more that consumers are forced to change their behavior to adapt to the situation,” he said in an e-mail.

Fitch Solutions, in a report, Philippines And COVID-19: Impact On Consumer Sector, estimated that real household spending will only grow by 3.4% this year, against 5.4% in 2019.

“We highlight that consumers are placing a greater focus on essential spending categories. For consumers in countries where a lockdown has been initiated, and for consumers who believe that their governments might implement this measure, the spending focus is narrowing further, with a concentration on priority purchases (food and non-alcoholic drink and health spending),” Fitch Solutions said in May.

Speaking at the BusinessWorld Insights Forum, Gary de Ocampo, president of the market research agency Kantar Philippines, Inc., said pantry stockers during the pandemic tended to favor food with long shelf lives, sanitizing products, vitamins and supplements.

“Filipino adults also claim to be eating healthier, trying out new recipes, sleeping more, exercising more and focusing on personal development. In terms of purchasing behavior, overall obviously declined across all channels. Even though majority understandably cut down mostly on non-essentials, many are compelled to switch to buying groceries near their homes and depended on home delivery,” he added.

Mr. De Ocampo said one-third of Filipino adults tried out e-commerce for the first time since the start of the lockdown, while television viewing, radio, and social media consumption spiked.

“A great majority look forward to meeting friends and relatives again and going back to church. These things, as well as other outdoor activities, are expectedly hard decisions to make as Filipinos struggle between wanting to step out of their home on hand and needing to ensure their own safety on the other,” he said.

McKinsey & Co. Singapore Partner Simon Wintels said consumers will assign a higher importance to affordability due to the uncertain economy.

“You need to think about value-for-money and affordability, as well as (reduce) discretionary spending. Filipinos are thinking about postponing up to 50% big-ticket items and that will have a significant impact on the economy,” he said at the Insights forum.

IMPACT ON BUSINESSES
The common perception is that those selling essential goods, like groceries and pharmacies, must have been among the least damaged by the downturn, but even they have had to survive staggering declines in business, while spending more on protective measures.

In a presentation to the House Committee on Trade and Industry in mid-May, Philippine Retailers Association (PRA) Chairman Paul A. Santos said foot traffic in the retail sector fell 81% from baseline levels in March.

He added that lost foot traffic for groceries and pharmacies was also significant — down 59% from baseline levels.

“It is the drugstore and supermarket sub-sectors that have been least affected by this crisis. Yet one drug store retailer reported that while its business may have remained stable or even increased, such gains were offset by expenses incurred for providing housing and transportation to its employees, as well as expenditures for personal protective equipment and the constant need to sanitize store premises,” Mr. Santos said.

“For a lot of retail businesses, 2020 is just a matter of survival now,” Mr. Santos said in another briefing organized by the German-Philippine Chamber of Commerce and Industry, Inc.

“For us, just to be able to stay alive until the end of the year is a blessing. We have to look to the future to be able to get by, to be able to survive these very trying times for our business. It’s still too early to tell but some of my colleagues were estimating that we have lost maybe around 30 to 50% of sales volume for 2020 compared to 2019,” he added.

Robinsons Retail Holdings, Inc. Vice President Gina Roa-Dipaling said foot traffic has indeed fallen off, but the decline in foot traffic was “more than compensated” by the increase in average transactions, or what retailers call basket size.

“The most bought products are canned goods, instant noodles and cleaning products. Consumers will continue to prioritize purchasing groceries and drugs,” she said in an e-mail.

E-commerce companies said the lockdown increased their virtual “foot traffic,” and expanded the lineup of companies seeking to sell on their platforms.

“We have observed more Filipinos going online to meet their everyday needs as people live, work, and play from home. Search and shopping activities have seen an increase in the past three months, especially when it comes to essential goods like groceries, health products, and personal care items,” Shopee Public Relations Head Erin Tagudin said.

She said that Shopee has partnered with various brands, sellers and logistics partners to ensure it can meet demand.

“We are also working together with various brands and sellers, including our logistics partners, to ensure that we… continue to provide greater convenience as (consumers) shop online. We will also continue to work with sellers and brands to ensure that we meet the demands of our shoppers and provide convenient access to their daily needs,” Ms. Tagudin said.

Despite the shift to online platforms from bricks-and-mortar stores, UA&P’s Mr. Manzano said that physical stores will remain important “as the act of shopping might be an enjoyable (utility enhancing) activity.”

“I would, however, mention that things will change when the vaccine is discovered. Old customs will come back, but not 100% because shoppers will already have experienced and gotten used to e-commerce,” he added.

Meanwhile, Ateneo’s Mr. Dumlao said close contact cannot completely disappear since it is “part of our nature as humans.”

“Being in close contact is part of our nature as humans so it cannot really disappear although it will slowly normalize in some new way. For example in the education sector, online learning will play a greater role. Still in the long run, when conditions allow, online learning will complement rather than replace onsite learning,” he said.

What’s next?

In the post-lockdown world, MKS Marketing Consulting Chief Brand Strategist Karen V. de Asis expects a significant proportion of consumers to return to their normal routines.

“Nearly 30% of Filipino consumers are likely to go back to their normal activities a day after the ECQ (enhanced community quarantine) is lifted while 28% expect to resume their activities one week after. Another 18% are taking things more slowly and said they will resume normal activity two weeks later,” she said in a BusinessWorld special report.

She said that basic necessities, personal hygiene, and pharmaceuticals remain the top three categories even after the lockdown, while automobiles have been relegated to the back of the queue.

Ms. De Asis added that consumers will likely return to brands they are familiar with.

“Post-ECQ, (experimenting on new) products and services… will be on a downtrend as money becomes tight… and there remains an air of uncertainty,” she said.

Kantar’s Mr. De Ocampo concurred, saying that consumers would want to “return to what they know” after the lockdown.

“When we look at survey data, consumers are not saying they aspire for a new normal.They want to return to what they know and that’s the real takeaway from the spike in comfort foods. It points to consumers wanting less change, not more change. Routines will be affected but may not necessarily be in the ways being popularized right now as the new normal, and they will definitely also vary across industries,” he said.

Because of the pandemic, Mr. De Ocampo said people will want to be prepared and not “get caught by surprise” again.

“We think readiness will be the new sign of success, the new status symbol. (Consumers) will want to know where to get essentials within their environs. Think about pack sizes, different purchase cycles, long expiration dates, even do-it-yourself products. How about investments and insurance and also how about shopping features or pre-buying, guarantees to ensure availability. Also, think of the possible need for storage solutions because a safety pantry with long-lasting essentials may become a permanent fixture in most homes,” he said.

UA&P’s Mr. Manzano said there will also be pent-up demand for “experience goods” which require proximity and travel.

“I think there is still pent-up demand for… concerts, tourism, trips to Disneyland, all of which require proximity and travel. I don’t think there will be a shift to minimalism in a big way,” he said.

To stimulate demand, the UA&P economists said that firms should “signal” consumers that they are meeting health and hygiene standards and that transacting is safe.

“One of standard remedies when markets fail due to asymmetric information is to provide some sort of ‘signaling.’ A certificate of having been tested and found negative of the virus could be used as an instrument for signaling. Alternatively, a record of thermal scan readings for the past 21 days could likewise be employed,” Mr. Manzano and Ms. Pesa said in their paper.

The economists said, however, that signaling will only work if it is credible.

“If the reliability of the current testing procedures in detecting asymptomatic carriers at all times is questionable, then the certificates of testing may not be very useful as a signaling instrument. Given the absence of credible signaling instruments to date, the fear factor will continue to hound the service sectors,” they said.

Mr. Manzano and Ms. Pesa said that the economy will only be able to fully recover if consumer uncertainty is mitigated.

“The trajectory of the economic recovery will not be easy for a number of reasons. First, consumer confidence is already low given the loss of income and the looming unemployment will drag it even lower. Second, the ‘fear’ factor arising from the risk of infection will dissuade many consumers from consuming services especially from the high-contact, intensive-service sectors. In the absence of a credible signaling instrument, that could mitigate the fear factor, the high contact service sectors would face a very difficult path to recovery,” they said.

Unless a vaccine or treatment is discovered, PRA’s Mr. Santos said that fear, uncertainty and doubt (FUD) will linger in consumers’ minds.

“The predominant attitude for consumers during this pandemic is FUD: fear, uncertainty, and doubt, and this is what will underpin consumer behavior for 2020 and probably beyond until and unless either a vaccine is discovered for COVID-19 or an alternative low-cost, effective treatment for the virus is discovered. Without these two, FUD will always be in the back of the everyone’s minds,” he said.