Throughout the COVID-19 pandemic, McKinsey Australia has regularly tracked the sentiments of Australian consumers to help businesses better understand the ongoing impact of social and health changes on consumer intention and action.
Now, as Australia transitions from two years of distinct pandemic management phases (isolation, suppression, and immunisation) and moves into “COVID-19 normality,” what are the legacy effects of those two years on Australian consumers and their intentions going forward?
Diving deep into the data based on the survey we conducted in first half of 2022, we have identified five emerging themes that describe Australian consumers and the businesses that market to them:
- tentative (but reactive) optimism
- a cautious return to out-of-home activity
- a concurrent recovery in out-of-home spending
- a continuing shakeup of brand and channel loyalty
- steady omnichannel ascendency
In this insight, we’ll unpack each of these in brief to contextualise them against other known social, cultural, and political data points.
Optimism: Australia in the global context
Globally, optimism has declined since the last pulse check, most likely driven by sombre global events, such as the war in Ukraine, rising inflation, and another wave of the Omicron variant of the coronavirus. While Australians are more optimistic now than in 2020, this doesn’t hold true for all countries. For example, US optimism remains on par with 2020 levels, and pessimism in Germany is now higher than at any other time during the pandemic, no doubt due to both the proximity of the war in Ukraine and the impact of the conflict on energy costs and availability.
Nationally, Australian optimism has risen from the mean of our surveys taken during the key pandemic year of 2020 (Exhibit 1).
But the rise in optimism has been cautious, and with good reason. The ongoing impact of the pandemic, natural disasters such as the floods affecting Queensland and New South Wales, and rising inflation have all contributed to a cautious national mood. Inflation hit a 20-year high of 5.1 percent year over year for the quarter that ended in March 2022.1 As a result, more than 80 percent of Australians in our survey reported concern about inflationary and cost-of-living pressures, while 60 percent expressed concern about ongoing geopolitical conditions. Nearly 45 percent of consumers who decreased their overall spending pointed to inflation as an important factor.
It’s therefore understandable that Australians—now armed with the lived experience of how pandemic recovery can be something of a stop-and-start journey—are not feeling as optimistic as they were prepandemic, but are nonetheless reporting 5 percent more optimism and 5 percent less pessimism in outlook than we saw across 2020 as a whole. However, with inflation and energy prices on the rise, cautiously optimistic sentiment may take a turn for the worse.
Two factors are associated with optimism in consumer outlook: wealth and youth. Optimism is clearly linked to income; higher-income consumers are far more optimistic than low- and mid-income consumers (Exhibit 2).
The correlation between income and level of confidence in the economy has been consistent throughout the pandemic; income remains a clear predictor of consumer confidence.
Similarly, there is a correlation between youth and optimism that is nearly consistent across generations—with Gen X creating a notable “hump” in pessimism, which could be explained by the likelihood that those consumers are at the peak point of mortgage stress.
It’s also worth noting that most consumers do not expect routines to return fully to normal until after June 2022 (Exhibit 3). Nearly two-thirds of respondents do not plan to splurge or treat themselves with nonessential purchases in 2022, a logical corollary to that sentiment. Even among optimistic consumers, optimism is tempered, and they calibrate spending decisions accordingly.
Our reporting of consumer data in the early phases of the pandemic suggested that Australians understood a clear connection between then-current economic impacts and a once-in-a-generation health crisis, and they had a clear belief that as the health crisis was mitigated and managed, a fundamentally positive economy would bounce back reasonably quickly.
With that in mind, this latest set of numbers is noteworthy because it suggests that even with most Australians vaccinated and with personal and business restrictions almost entirely removed, Australians retain an element of caution about the economic future. This implies that either the stop-and-start experience of 2021 has left Australians unsure that the effects of the COVID-19 pandemic are really over or that a more complex mix of concerns is now in play (such as environment, inflation, and institutional confidence).
A cautious return to out-of-home activity
As jurisdictions remove restrictions on movement and activities, Australian consumers expect to return to out-of-home activities and out-of-home spending (Exhibit 4). However, the Australian spending trajectory is cautious compared with those of the United States and the United Kingdom. This represents a shift from the “comfort in the castle” spending push that spiked in 2020 (although that spending driver does remain strong, as we’ll discuss).
These spending projections are consistent with the gradual return to prepandemic behaviour that Australians are reporting across demographics, with almost half of Australians reporting that they are engaging in normal out-of-home activities again.
While this includes returns to workplaces, it’s also worth noting some significant jumps from 2020 spending in terms of optional activities such as nonessential retail, restaurants and bars, cultural activities, and personal-care spending (Exhibit 5).
While this optimistic engagement is notable, consumers are still tempering their return to these activities, either in frequency or in how they engage with the activity. This suggests that consumers are still being more judicious about which event, sale, dinner, or get-together to prioritise, and that an ongoing mindset of caution continues to have an impact on spending that relies on a truly carefree consumer state of mind, such as mall-based retail. As stores have re-opened, consumers are still somewhat changed, and so retail environments and experiences built to encourage us to forget the time, or why we came, will likely need a period of adjustment too.
A concurrent recovery in out-of-home spending
Renewed consumer activity is translating into increased spending, but not consistently.
Some Australian consumers have accumulated wealth since the start of the COVID-19 pandemic and are ready to unleash spending as life returns to normal, boosting consumption (and inflation). The household savings ratio, which was above 20 percent at the height of the pandemic, dipped to 11.4 percent in March 2022 from 13.4 percent in December 20212—still well above prepandemic levels.
However, it’s a tale of two groups, with high-income consumers driving the spending, armed with extra savings, while low-and-mid-income consumers have depleted their savings (Exhibit 6).
Although the “cocoon” spending of 2020 has diminished in social and consumer priority, a legacy of ongoing fluidity in work models and the importance of the home as a sanctuary have left a still-strong focus on priorities such as working from home, schooling from home, and renovation. This focus is a natural consequence of those main life priorities, such as the 23 percent of respondents engaged in a home renovation or the 21 percent working more from home than before the pandemic.3 All of these social or personal shifts suggest medium- to long-term effects on spending priorities in related product categories.
A continuing shakeup of brand and channel loyalty and steady omnichannel ascendancy
In early 2020, we noted that Australians—whose adoption of many digital retail and service channels had lagged most Asian consumers—began to catch up as they realized that there is no virtue like necessity.4 Two years later, this narrative remains consistent, and likely permanent shifts in consumer behaviour express it clearly.
Alternatives to in-store shopping greatly expanded during lockdowns, with a high level of stickiness and integration into ongoing purchase intention. Overall, about 70 to 80 percent of new online-product or online-service users intend to continue this channel option.
And this is not just about services of convenience or a click-and-collect mentality. Many complex products or services have successfully migrated consumers to a digital experience, and users indicate a strong intention to stay in the digital space (Exhibit 7). This includes sectors such as fitness, medicine, mental health, and education, which before the pandemic were primarily in-person experiences.
Now that Australians are comfortable with diverse methods of spending and engagement, we are not surprised to see an influx of Australian consumers participating in omnichannel shopping (Exhibit 8). This appears to be particularly true for discretionary goods and services, with lines such as apparel, jewellery, and electronics retaining the lowest loyalty to brick-and-mortar retail.
While we have seen Australians embrace digital channels, they still lag their global peers, leaving ample room for online and omnichannel to continue expansion. In the United States, for example, consumers conduct 50 to 80 percent of research and purchases online or through omnichannel.
While pandemic lockdowns influenced some changes in set consumer behaviours, pandemic-related supply chain issues have similarly forced (or at least incubated) increased experimentation with different products, services, or brands than those originally sought (Exhibit 9).
Most buyers who were unable to buy a preferred brand at a preferred retailer ultimately purchased either an alternative product or the preferred product from an alternative source—although more switches occur at the channel level than at the brand or product level.
Just as experimentation with new methods of engaging with services has left substantial, “sticky” changes, experimentation with alternate brands, products, or retailers is also creating a lasting effect. Most Australians have experimented with different brands or retailers in the past year, and 74 to 86 percent of consumers say they intend to continue that behaviour (Exhibit 10).
There is some easing of this enthusiasm against new methods of shopping that is not present when trying a different brand, suggesting that changing what we buy may be a more permanent shift than changing where or how we buy it. Retailers and brands should continue to entice shoppers by offering brands with additional value, such as a better price or better packaging.
Key conclusions and looking ahead
Australian retail has reopened, and the nearly universal political signalling that living with COVID-19 is the only way forward, is giving consumers the confidence to re-engage with beloved brands and experiences. But they do so with understandable caution given the stops and starts of Australia’s journey out of lockdown and the economic stress this has caused, particularly on lower-income consumers.
Just as 2020 illuminated the flaws in our thinking about work and education, it also shattered long-standing assumptions about what we buy and how we buy it. Retail environments and experiences built carefully over generations will need to adapt following an experience that has reset paradigms across all generations and income sectors—particularly the assumption of brand loyalty.
All in all, the opportunity to seize the advantage in digital or omnichannel experiences remains wide open, and the case for pro-digital retail investment has yet again moved forward.
We are not the same consumers we were in 2019, and smart retailers will respond accordingly.
How can retailers and consumer goods companies respond?
For retailers and consumer goods companies to stay ahead of the factors shaping consumer preferences and gain a sustainable market advantage, our analysis suggests executives should think about the following questions:
- How will a changed hierarchy of needs and priorities shift what matters to consumers and what they buy, how they buy it, and what they are willing to pay for it?
- How do you quickly realign your product, brand, and pricing architecture to meet the needs of value and price-conscious consumers?
- How do you reduce the customer churn because of the price increases? Which levers should you focus on to mitigate inflation risk in the short term and medium term?
- Are you in the right online and offline channels based on where your consumer base will flow?
- Are you investing in the right last-mile capabilities that will offer consumers a seamless omnichannel experience?
- What is the fastest way to stabilize and redesign stretched and—in some cases—broken supply chains? What capabilities you will need to increase your company’s resilience, ensure product availability, and control costs?