Mixed signals: Global consumer trends in flux

Across the globe, the consumer economy is sending mixed signals. In the US, inflation is showing signs of renewed momentum, despite cooling energy prices. In Europe, retail spending is sagging under the weight of high interest rates, while in Asia, particularly in China, consumers remain cautious despite efforts to stimulate the economy.

At the same time, technology-led retail innovation and shifting demographics continue to reshape consumer patterns.

What are current consumer purchasing patterns?

There are differences across markets, but one thing to bear in mind is that times have always been tough for consumers and consumer companies.

I wrote a research note a while back because I'd noticed that company chief executives kept using the word ‘challenging’ when describing the environment. I did a study to see how many times these CEOs had mentioned the word in their earnings reports over the last ten years.

Across 40 consumer companies, 75% of earnings reports over ten years mentioned the word challenging. So, you can see that they are always aware of difficulties facing both themselves and consumers.

In the US, the statistics show that consumer confidence is low by historical standards, and that is showing up in the goods that they are buying and the price they are willing to pay. Overall, sales are trending down in most categories, both at the bottom end, where we're seeing consumers increasingly going to discount stores, like Dollar General and Dollar Tree, or club stores like Costco, and at the top end.

Quite surprisingly, luxury goods sales are falling, and they have been for over a year now in China, which is the other big market. China has been very sluggish for several years because property prices there are under pressure, and the Chinese consumer is nervous about paying for most goods.

There is a similar story in India and Mexico, perhaps not quite so pronounced, and elsewhere, so it is a mixed picture.

Consumers are under pressure. And the reason for this goes back to Covid-19, which was an existential change to the world. Every country, every consumer, was affected by lockdowns that led to price inflation.

What happened with the companies I look at was that they raised their prices to reflect the increase in raw material prices and the cost of moving goods between countries, as they were only opened up gradually for trade. We reached a point where so much price increase had been taken that it became impossible to continue doing that, and that led to the pressure that companies are facing.

It's a worrying time for the consumer, in terms of prices right now and looking ahead to what's going to happen.

On top of that, we've had conflicts in Ukraine and the Middle East, and, more recently, US tariffs. Inevitably, some of those extra costs will be passed through to the consumer. So, it's a worrying time for the consumer, in terms of prices right now and looking ahead to what's going to happen.

 

What is happening on pricing, brand choice and consumer sentiment, particularly consumers’ approach, behaviour and thinking patterns?

With tariff levels moving so much and so frequently, and with uncertainty about how they will end up, consumers are inevitably nervous. But we must remember that tariffs don't have a blanket impact on all sectors.

Within the consumer environment, there are certain areas, such as footwear (like Nike and Adidas), where, because they import a lot of goods from Asia, prices are going up significantly, so those companies will be hit quite hard.

It is similar with spirits. Diageo, the world's biggest spirits producer, sells Scotch whisky in the US. They can't produce it anywhere other than in Scotland for obvious reasons, so they will be hit in terms of pricing by the tariffs. The same goes for Remy Cointreau with Cognac.

There are some US retailers, like Target, that have historically imported a lot of goods from China, so they, too, are learning to deal with tariffs. But I don't think we are seeing a lot of change in US consumer patterns, other than what we have said about the decline in sales due to rising prices.

There is another noticeable thing. When I met Coca-Cola’s management recently in France, they brought out a bottle of Coke and pointed out that on the metal cap on the glass bottle, it now says, ‘made locally’ rather than made in the US, as a consumer might assume. They said that this is one small way they can counter some anti-American sentiment among consumers.

Artificial intelligence (AI) is reshaping everything from product discovery and customer service to pricing and strategy. How is AI impacting brands and the way consumers make purchases?

AI is front and centre for the management teams of the companies we look at. We can view AI from the perspective of:

1. Brand owners and producers.
2. Retailers.
3. Consumers.

For brand owners, a good example is Colgate, which has a 70% share of the global toothpaste market. That means they sell a lot of their product in tiny ‘mom and pop’ stores in emerging markets. India is perhaps the biggest for them. These stores are owned by locals who may have no affiliation with a larger group.

It is impossible for someone from Colgate to go around all of these stores regularly. So, one thing they have started doing is to ask the store owner to upload pictures of their store showing how their shelves are organised. Colgate has an AI programme that scans the photos and comes up with a recommended reshuffling of how the retailers display products on shelves. They send that back, and the retailer might move the Colgate toothpaste to the left a bit, down a bit or up a bit. It might move less frequently purchased goods to the bottom and higher-margin products to the middle.

The result is a win-win because the retailer gets more profit overall as they are displaying the goods in a more appropriate manner. From Colgate's perspective, they get a closer relationship with their retailer and more data from them. The cost of it is very low indeed, and many companies are doing this.

 

Another way brand owners are using AI is to come up with different formulations of ingredients for their brands to try to lower the price and maybe come up with new flavours.

Another way brand owners are using AI is to come up with different formulations of ingredients for their brands to try to lower the price and maybe come up with new flavours.

Walmart is a great example of how retailers are using AI. They were telling me that historically, if they had a huge truck come into one of their warehouses to unload, it would take about two days to ensure everything was on it that was supposed to be. Using AI, they can almost reduce that to less than an hour.

The cost savings in terms of time and quickly getting stuff into the store are absolutely huge. And the other thing that they can use it for is demand forecasting. If Walmart historically has been unsure how swiftly it will be able to sell a batch of washing powder or something like that, it can use scenario analysis.

Looking at things from the consumer's point of view, before they might use a search engine like Google to look for where they could buy products. Increasingly, younger consumers are using AI to conduct a deeper search of what's available and recommended ways of purchasing.

What that means is that companies need to be absolutely sure they are connecting with the consumer, such as online.

Increasingly, younger consumers are using AI to conduct a deeper search of what's available and recommended ways of purchasing.

 

With media fragmentation and personalised content, will a brand not succeed unless it adapts to stay both visible and relevant?

Most of the big brand owners are very savvy about what's happening. The data they're getting is better, and they can pick up on trends more quickly than before.

We’re seeing a dramatic shift with TV, which is not the powerhouse it used to be for the likes of Unilever, Procter & Gamble, and Estee Lauder, who used to be among the top 10 advertisers on TV in the world. They need to be on the internet, employing influencers, for example, to access social media, which is where young people will be looking for their products.

AI is also allowing a company like Unilever to produce its own adverts much more cheaply than employing a third party.

 

When I talk to companies, a big theme that they often bring up is that because they've got more data about their consumers, they can use that to make personalised offer.

A big pet food company owned by Nestle was telling me that because of the feedback they get from consumers, they pretty much know the age of each individual's dog and what sort of food it likes. There is extraordinary granular detail that some of these companies have on their consumers.

If you know who's buying your product, how often and why, then you can, with the help of technology, offer them personalised vouchers or discounts rather than printing hundreds of thousands of them, most of which get thrown away rather than used.



Eddy Hargreaves, Global Consumer Analyst, Investec

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Does innovation give brands an edge, or are ease and convenience still going to win the day?

I think consumers want both. And if push comes to shove, then convenience is a given – you have to have your product where it is wanted.

One thing that innovation gives you is a greater ability to raise prices. It's challenging to increase prices on a product if you're not offering the consumer anything new or any excitement. It can create a bad feeling with the consumer. If you can change even the packaging, that can be helpful.

One thing that innovation gives you is a greater ability to raise prices. It's challenging to increase prices on a product if you're not offering the consumer anything new or any excitement.

You have to move with the times. Ferrari is introducing its new electric-only model as they've seen the way consumers are moving, what consumers want, and what the world wants. Despite its rich heritage, they are taking the plunge into a new market, and tests suggest that's going quite well.

Another recent example is Marks and Spencer introducing a strawberries and cream sandwich around the time of the Wimbledon tennis tournament. On the face of it, it doesn't sound that appealing, but it was an idea that was popular in Japan, and when it came to the UK, it was a complete viral sensation. They couldn't sell enough of the strawberries and cream sandwiches. It is very ‘Instagrammable’ and everyone wanted to go out and try it.

Ferrero, the Swiss chocolate manufacturer, has bought the Kellogg cereal business. Part of the reason for that is to diversify what they're selling in case chocolate prices shoot up. But it also gives them some ability to invent new products, around the idea of chocolate corn flakes, and to take that one step further with different flavours. So that's something that's happening, and AI is helping with all that.

 

Do consumer values around sustainability and ethical buying hold up when budgets are tight?

If you are a very low-income consumer and increasingly stretched, then if they are significantly more expensive, you may simply be unable to buy them.

 

Sales of those products have been suffering a little bit. But that's not to say that the companies are not still producing them because there is a market for them.

Regulations have been playing their part as well. There have been high-profile cases of companies importing clothing from China, which has been produced in factories that were using forced labour. That's now a practice that has been stopped. Clearly, it meant that the companies didn't want to be associated with that behaviour, and so had to source their cotton elsewhere, which has led to prices going up as well.

Fair trade deals for cocoa and coffee farmers in East Africa, Brazil, and elsewhere have also been established.

However, some corporates are pulling back a little bit as well. Adidas springs to mind. It started producing mushroom leather shoes, but I think they've since realised that the market for that product isn't quite as big or expanding as fast as they'd hoped. And so they have moved back more to their roots of sports and football boots produced more traditionally.

 

How are demographic changes like ageing populations reshaping consumer expectations and loyalty?

This is a longer-term trend. We've had ageing populations in China, North America and Europe for many years now, and a very young population in many emerging markets in Africa, Latin America, Mexico and parts of Asia.

This trend isn't particularly new, but we are seeing companies like Estee Lauder and L'Oreal focusing more on creating products to address greying or brittle hair and ageing skin, as people get older.

But you can't change everything all the time. We've seen Toblerone try to change the shape of its triangles in the Toblerone bar. They had to row back from that and return to the traditional shape of the triangle because consumers – young and old – hated the new pyramid shape.

So, it's not just older people who are resistant to change. When we look at the consumer ten years hence, there will be a huge number of younger consumers coming into the workforce, who will be part of the emerging middle class. That is really where the concentration is for most of the big consumer companies and retailers at the moment.

 

For retail categories, what are you seeing in terms of momentum and acceleration, and what is under pressure?

There's a bit of a mixed bag. Some of the things that are going well are soft drinks. Coca-Cola is still seeing excellent sales-growth momentum, not only in emerging markets, but also in developed markets. They're creating new pack sizes and new flavours, but generally finding, I think, that the price elasticity, in other words, the price increase, they're able to put through without affecting volumes too much, is better than they thought it would be.

And then, perhaps linked to demographics, energy drinks (where Red Bull and Monster are probably the two largest worldwide) are also performing very well at the moment.

Spirits have been under a lot of pressure. It seems that there's a consumer shift away from spirits, and the same can be said for a number of food categories. This is where diet drugs come in, particularly in the US. People are using diet drugs that suppress the appetite, and that does start to shift what people are eating and in what volume.

 

As well as the impact on food, are weight loss drugs having a domino effect on the general wellness industry and even the apparel industry?

Yes, and I've even seen it said that even the airline industry might be affected because if people weigh less, the costs will reduce because they won't need so much fuel to fly.

I think there will be knock-on effects for the apparel industry, perhaps less so, because it would just mean making a change in the sizes. And certainly, for food, where absolute volumes might suffer a bit. 
It's a bit too early to be sure where this is leading. I'm tending to think that it will have a moderate impact on some of these companies.

 

What is the state of the luxury market – is it still the bellwether of upper-income confidence, or is the sector also under strain?

It's under a significant degree of strain. Jewellery is still selling well, but if we look at companies like LVMH or Richemont, on the whole, leather goods and handbags are not selling quite as well as they used to.

Part of that is that it is difficult to innovate in handbags compared with some other consumer areas, and partly because they are just very high-priced items, and people are cutting back on that.

 

Are the ultra-fast fashion platforms, like Shein and Temu, reshaping consumer expectations?

Yes. Shaping them in a way that consumers will want cheaper prices and more convenience. But there is a bit of a backlash on the ethical front. Shein and Temu are Chinese, and so there's some uneasiness perhaps about the provenance of what they're selling.

Shein has been trying for an initial public offering (IPO) in several big markets like New York, London and Frankfurt, but in each case the exchange has been unwilling to proceed. It looks like they may now list in Hong Kong, but clearly, there's a general nervousness about dealing with them. And this, of course, also comes down to the uncertainty of knowing what's going on in China generally.

There has also been some change in regulation. For example, the tax on small packages going into the US used to be at a beneficial rate, but that's been removed, so the cost advantage of selling into the US or potentially into the UK has been reduced quite a bit.

We are also seeing the rise of pre-owned garment websites, like Etsy and Vinted, where you can buy second-hand clothes.

 

These have really taken off with youngsters who buy clothes on these platforms because they are cheaper than buying new.

Plus, they have the cachet of being ethically better, as you are not causing companies to produce more goods that are thrown away.
 

AI, and technology generally, is both shrinking the world of the consumer and speeding it up.

 

Are changing consumer behaviours a short-term adjustment or are we witnessing a deeper, longer-lasting shift in how people think about brands and consumption?

It's a bit of both. In some ways, the consumer has been evolving forever. Trends like the emerging middle-class demographic and innovation have always happened.

On top of that, the speed of change is accelerating, prompted by AI and the ability of people to connect with each other to see what everyone else is doing. AI, and technology generally, is both shrinking the world of the consumer and speeding it up.

And then we've got China: Chinese brands are developing very fast. We've seen BYD in the automobile space being very successful. The quality of Chinese brands is improving, and they simply can't be dismissed anymore. So that's a short-term trend.

But throughout all this, brands are the key, and it's going to take a lot to shift them off their perch.