While the start of vaccine rollouts offer hope that the worst of the pandemic may be over, its devastating financial impact for many will be felt for a long time to come. In research spanning 18 countries from the Deloitte Consumer Industry Center, we find evidence of continued household financial distress.[i] One in five consumers are spending more than they take in as income. During the course of the pandemic, they are twice as likely to have had their financial situation change for the worse and to indicate that they have cut back on staples like groceries and household goods.
That can lead to tough choices like dipping into savings, increasing the use of debt or prioritizing which upcoming payments will be missed. Even larger numbers of consumers are worried about this becoming their fate. Forty percent of all consumers in our study are worried about the amount of their savings and credit card balances.
Since the 2008 Great Recession the divide between more affluent consumers and lower income consumers has grown.[i] Just as the pandemic accelerated the adoption of contactless commerce, video conferencing and home gyms, it also accelerated this bifurcation. The pandemic has created one world among high income people who can work at home and make discretionary purchases, and a second world of people who are more likely to be unemployed and/or more limited in their buying ability. While the pandemic has inconvenienced more affluent consumers, others have experienced a severe economic crisis that is likely to extend for some time.
Economists talk about the “K-shaped” recovery—to describe how different segments have experienced, and will continue to experience, the effects of the pandemic.[ii]Our research shows that the K-shaped recession and recovery are features of many economies and a direct outcome of the pandemic’s acceleration of a long-term change in the labor force.
Globally, the chances of being unemployed were about six times higher among low income workers compared to high earners though that varies by country. The ratio is higher in the United States (nine times as likely). While in Germany, low-income workers were only four times as likely to be unemployed. The difference is likely the result of Germany’s Kurzarbiet scheme to keep workers attached to their employers (so they aren’t officially unemployed) compared to the U.S. use of unemployment insurance. Similar schemes are set-up in all Western European countries.
With the pandemic, unemployment was, in many cases, spurred on by an inability to work from home. Consistent with World Bank research that finds that “jobs more amenable to WFH are more prevalent among workers with high levels of education, in salaried employment, and among younger workers,”[iii] high income workers in our tracker are almost twice as likely to be working at home as low income workers.[iv]
Spending bifurcation is also very clear. We track spending intent on 15 categories of goods and services ranging from groceries to travel. Some of these, like housing and medicines, are essential, or non-discretionary from the point of view of the consumer. Others, like entertainment and electronics, can be more easily postponed or managed without. This is discretionary spending.
Globally, since early May, the difference in discretionary spending intent has widened. At that time, approximately 40% more high-income than low-income households planned to spend more on discretionary goods. By the beginning of January, about twice as many high-income households reported such plans.
Not only are high income households now even more willing to open their wallets for “nice to have” items, they are also a third more willing to pay for the contactless commerce and other forms of convenience accelerated by the pandemic. This differs quite a bit by country. Germany and the Netherlands lead the way by being three to four times more likely to pay for convenience respectively. And despite the importance of convenience during the pandemic, lower income households are less willing (or able) to pay for it.
How should businesses respond?
For the past few years, we have advised Retail and other consumer companies to prepare for a corresponding bifurcation between price-based value and value delivered through differentiated product or services.[i] Indeed, priced-based mass merchants and luxury brands fared well while others struggled during the pandemic. Possibly more than ever, companies should urgently refine their focus.
Specifically, they should:
- Deepen empathy for consumers and employees. Wall Street and Main Street have experienced the pandemic differently. Don’t be fooled by rising indices. Reconnect with and evaluate your investments in your customers and employees to better understand their experiences and needs.
- Make trust a guiding principle. Trust in institutions overall is in decline, but it is critical to success. Eighty-five percent of customers choose trusted brands over others, compared with only 60% who select brands they don’t trust.[v] Trust has clear impact on financial performance.[vi] Investing in and continuously building mutual trust with consumers can help ensure they come along with you on the journey, even when inevitable shocks occur.
- Become more granular in your consumer observations. The standard, historical data relied on pre-pandemic may not capture new consumer realities. Decisions made based on old data models can easily go wrong. While continuing to rely on judgment and instinct, leaders should also get creative in seeking new forms of outside-in real-time consumer, marketplace, competitive, and economic data to inform decisions.
- Become more precise in your value propositions. Adjust how you segment consumers, prioritize channels, establish product portfolios, position your brands, and deploy service models in ways designed to address your chosen strategy and explicitly avoids getting caught in the shrinking middle.
- Be agile with your channels. The shift to digital was already happening, but COVID accelerated consumer adoption. Companies that invested heavily in their digital commerce, services, and offerings pre-pandemic (e.g., mass merchants) shifted faster between channels and fared better than those that did not. Recently, half of consumer company executives said they will be increasingly reliant on online and omnichannel strategies.[vii]
Other contributors to this piece: Steve Rogers, executive director, Deloitte Insights Consumer Industry, Deloitte LLP and Danny Bachman, US Economic Forecaster, Deloitte
[ii] See Eric Morath, Theo Francis, and Justin, “The covid recovery carves deep divide between haves and have-nots,” Wall Street Journal, October 5 2020.
[v] Deloitte Consulting LLP, Deloitte HX TrustIDTM survey, May 2020.
[vi] Stephen M. R. Covey and Donald R. Conant, “The connection between employee trust and financial performance,” Harvard Business Review, July 18, 2018.
Leon Pieters is the Consumer Industry leader for Deloitte Global, where he is responsible for overseeing globally four consumer sectors: Automotive; Consumer Products; Retail, Wholesale & Distribution (RWD); and Transportation, Hospitality & Services (THS). Leon is charged with setting the overall strategic direction and go-to-market strategy for the practice.
Anthony is a partner in Risk & Financial Advisory within Deloitte & Touche LLP. He currently serves as both the US Consumer Industry Leader and Advisory Consumer Industry Leader. Previously, he led Advisory’s Finance Transformation practice and is a former member of Deloitte’s cross-business Finance Transformation leadership team. With nearly 30 years providing finance transformation services to multinational clients in the consumer products, manufacturing, transportation, retail and distribution sectors, he focuses on assisting clients with transformational projects involving the development and/or evaluation of finance operations and programs designed to improve financial integrity, compliance and operational effectiveness and efficiency.
Dr. Cedric Dark, Assistant Professor at Baylor College of Medicine & Board Member with Doctors for America joins Yahoo Finance’s Kristin Myers to break down the latest coronavirus developments as the U.K. authorizes emergency use of the Pfizer, BioNTech vaccine. For 2020 election results please visit: Election results: https://www.yahoo.com/elections Subscribe to Yahoo Finance: https://yhoo.it/2fGu5Bb
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