Simple Signs

Governments and central banks have an unprecedented array of financial indicators and economic dip-sticks at their disposal for assessing the fiscal health of countries today.

However sophisticated financial instruments are not always essential in order to get a reliable measure of consumer sentiment and confidence.

Earlier this month two pieces of micro-economic information were released on both sides of the Atlantic Ocean within a day of each other – one in the UK and the other in the US – both items revealed consumers in the two countries are feeling the ‘squeeze’.

Firstly, US restaurant chain Starbucks – the coffee giant that everybody loves to hate – announced plans to close 600 outlets across the US due to a drop off in activity as hard-up consumers opt to make their own coffees.

The number of closures amounts to just shy of 10% of the group’s outlets across the country.

The following day, Starbucks’ woes were similarly reflected over in Europe where UK-based middle-class focused retail giant, Marks & Spencer, released a shock profit warning in what is meant to be a defensive company – given half of its income is derived from food sales.

The warning triggered panic among traders and sparked a £1.2 billion (AU$2.5 billion) slide in the group’s share price as increasing numbers of shoppers seemingly opt to purchase their groceries at the UK’s discount chains over the more upmarket M&S.

This drop in discretionary spending is the type of behaviour that detriments underlying confidence levels among consumers, and is something that can quickly feed on itself, as the people who make and sell the drinks and food sold in the likes of Starbucks and M&S also have families to feed and bills to pay.

So after observing this, a few of researchers here at CoreData set out to understand exactly how consumers are feeling in Australia, that is, beyond the quarterly investor sentiment index the group has run for more than four years.

Interim findings indicated the pain that is apparent in the UK and US is also evident in Australia.

More than half of Australians are eating out less now than they were three months ago.

A similar proportion are buying less food or buying in bulk, many are buying less from cafes and more than half of those who work are making their own lunch.

Reducing costs at home is also a prominent behaviour now with consumers trying to cut back on energy, phone, Internet and pay TV usage.

A large proportion of consumers have also cut back on the frequency and duration of car usage, and in some cases have downgraded to smaller engine cars.

One in three families are planning to go on less or smaller holidays now.

These same consumers, or at least some of them, are also clients of financial planners.

With all this in mind, the immediate future is likely to prove (in some cases, already is proving) to be extremely tough for many financial planning businesses, particularly those firms with weaker client relationships and lower levels of ongoing service.

What this means is more of those firms whereby a greater proportion of a client’s satisfaction experience is determined by sheer performance are likely to feel the pressure.

Generally speaking the banks are the first ones to feel the pain, just as they’re the first to reap the benefits in an economic upswing.

This isn’t to say bank planners don’t provide clients with good service, however CoreData research has found that bank planners tend to have a higher number of clients per adviser and tend to personally meet with fewer proportions of them on an ongoing basis.

This means more transactional clients and therein less sticky clients.

It’s not all doom and gloom though for planning businesses.

For clients who are able to stomach the unrealised capital losses they’ve experienced in recent times and have solid relationships with their advisers, these individuals are more likely to remain in the market for the long haul.

From a stock perspective, the vast majority of listed firms are continuing to pay healthy dividends, which partly takes the pressure off those planners with high proportions of clients heavily reliant on the income streams delivered by their investment portfolios.

However nobody likes to see capital depreciation and the fact the market has now lost 25% since its peak in October 2007 means increasing numbers of investors and clients will be feeling the impulse (if they haven’t already) to seek answers and make changes.

It’s in times like these when good planners really earn their stripes.

(To find out more about how people are changing their spending habits – read Feeling The Squeeze in this week’s edition of burningpants.)

The article recently appeared in IFA magazine.