Persistent inflation and economic uncertainty are creating a dual challenge for retailers. On the one hand, operating costs are elevated; on the other, consumer preferences are frequently changing amid cost of living pressures.

In response, retailers are proactively developing new strategies to optimise operations and adapt their offerings, pricing and customer service to keep pace with consumer expectations. This includes a sharper focus on data to help unearth consumer spending and behavioural trends as they evolve.

CommBank iQ’s latest Cost of Living Insights report, based on a de-identified dataset of Australia’s largest bank spanning approximately 7 million Australians, confirms that consumers are shopping differently amid economic pressures. It shows that at a national level, they continue to find ways to reduce their spending.

However, Wade Tubman, CommBank iQ’s head of innovation and analytics, explains that “analysis of spending changes in sub-categories, from general retail and pharmacy to quick service restaurants, reveals they are moving at varying speeds”. 

Spending on essentials holds consumers’ attention

At the highest level, consumer spending behaviours reflect the inflationary environment and increasing prices for many goods and services. The impact on household budgets is keenly felt, and the consumer response is still playing out.

The Cost of Living Insights report evaluated spending in the March quarter of 2024 compared to the same quarter a year earlier. It shows that economy-wide spending increased by 2.5 per cent, behind inflation, which climbed by 3.6 per cent over the same period, refer to the graph below.

Spending on essentials tracked the inflation rate, rising 3.6 per cent to an average of $1472 per month over the quarter. “Of course, consumers have less flexibility to cut these expenses,” Tubman says. “Any price increases in essential items leaves people with fewer choices about where they spend their money.”

“By category, essential spending was driven by higher supermarket, insurance, medical and pharmacy expenses. For these sectors, an increase in average transaction sizes suggests higher prices contributed to the uplift in spending,” Tubman said. 

According to the report, discretionary spending increased 1.4 per cent to $1386 per month on average, so, it contracted in real terms. Here, people spent 3 per cent more on general retail and 2 per cent more on eating out and food delivery, while spending on household goods fell by 3 per cent.

Some sub-categories rise faster than others 

Looking even more closely at where people are spending shows certain segments experienced stronger growth. For example, within the medical and pharmacy category, pharmacy expenses grew fastest, increasing 8 per cent year-on-year.

Eating out and food delivery was another category where digging into the 2 per cent overall spending increase shows a mixed picture of spending. In this category, spending on quick service restaurants was up 5 per cent, while it declined by 2 per cent for cafes and casual dining options.

“This dynamic in the food and beverage sector indicates that people may be seeking more affordable dining options and reallocating some of their spending. At the other end of the market, spending on premium venues also increased, but that accounts for a smaller part of the average wallet,” Tubman said.    

Age plays a significant role in spending behaviours

As businesses consider how the needs of their customers are changing and mount their responses, the research confirms the influence of age and life stage on behaviours. In the March quarter, younger Australians were the hardest hit by cost of living pressures, while spending among over-60s ran ahead of inflation.

“This divide is best reflected by comparing spending between 25-29-year-old Australians and those over 65,” Tubman said. “This younger group were the only ones to pull back their essential and discretionary spending. Retirement-age consumers spent more freely, increasing discretionary purchases on travel, eating out and food delivery, and general retail.”

“Whether viewing spending changes through the lens of demographics or categories, we believe behaviours are likely to persist even as cost of living pressures abate. For franchises and any consumer-facing businesses, understanding and catering to these preferences is essential to navigating current and future market conditions,” Tubman concluded.  

• To learn more about how retailers can unlock value from up-to-date customer behaviour analysis and market movements by CommBank iQ, visit commbank.com.au/commbankiq

• Discover why so many retailers choose CommBank as their banking partner, visit commbank.com.au/retailers

Things you should know:

This article is provided by CommBank iQ, a joint venture between Commonwealth Bank of Australia ABN 4 8 1 23 1 23 1 24 (Commonwealth Bank) and The Quantium Group Pty Limited (ABN 4 5 1 02 4 44 2 53) and is based on information available at the time of publishing. For the full disclaimer, please refer to the full report here.

Commonwealth Bank of Australia ABN 48 123 123 124 AFSL and Australian credit licence 234945.