I can’t think of anything more politically incorrect than my next few words: Australia is going to need the affluent and successful people in the community to keep spending and/or generating wealth and jobs to offset at least part of the massive spending reduction created by the blows being delivered to big mortgage holders.
As I pointed out on Tuesday, the full force of those blows will land around December-January.
So today I want to look more closely at the habits of those in the affluent segments of the community. Canberra needs to be alerted to the dangers of launching an all out attack on our big spenders on the basis that the rich must be attacked to balance the society. The decision by treasurer Jim Chalmers not to revoke the previous government’s tax cuts gave the government great credibility among the more affluent.
On the other hand, the planned attacks on superannuation, independent contracts and, new rules for enterprise bargaining which will make conducting business and investing more difficult and less productive. They are dangerous at this point of time. However, some burden sharing by the affluent will be seen as fair and will not impact momentum.
In the US this week, the affluent were almost certainly the big drivers causing parts of the American economy to perform better than expected by economists, which then sent bond interest rates rising again.
In both Australia and the US, the enterprises that will be among the top achievers in coming years are those that can tap the spending power of the affluent. It will require a very different marketing approach to those trying to earn profits by selling to the downtrodden mortgage belt.
Michele Levine and Ross Honeywill at Morgan Research have been isolating the affluent groups for many years. They calculate that about 10 per cent of Australia’s wealthiest people by assets own around half the nation’s wealth which is why they are seen both as a top tax target and a marketing opportunity. According to Roy Morgan data, on the income side, around 423,000 Australians earn in excess of $200,000 per annum.
The two largest groups among the asset and income wealth generators are the so-called traditionalists and the NEOs.
The wealthy traditionalists, although usually not materially impacted by interest rate mortgage increases, are likely to lose confidence as the share, property and bond markets fall, causing their wealth to decline. Even though their wealth is still large, they often start worrying and many curb spending even though they can still afford to spend.
Most of us know wealthy people who simply hate spending. Honeywill tells the story of Kerry Packer, who was Australia’s richest traditional consumer. In his Park Street headquarters in Sydney, there was a tatty sofa in reception. Visitors would sit on it cautiously and unhappily. Every time one of his managers tried to replace it, Mr Packer wanted it returned, declaring, “I paid good money for that couch, and it’s still perfectly serviceable.”
But like many traditionalists, Kerry could be tempted to spend. In his case, it was gambling at the casino. There will be big rewards for those enterprises who can successfully convince traditionalists to spend. One of the reasons conventional marketing fails on this group is that usually the campaigns are designed by young marketers who have little idea of the way affluent traditional consumers think.
Many traditionalists will be put under great pressure to help educate their grandchildren if their children are caught in the mortgage vice.
Affluent Neo consumers (new economic order) are a different breed and require a different marketing approach. They are entrepreneurial, either in their own business or as highly paid executives in large corporations. They are big investment borrowers but usually know how to trade their way out of troubles, they encounter
They will be looking at the government’s big spending on environmental projects and devising ways to take advantage.
In their consumer spending, affluent NEO’s take mental shortcuts to make decisions based on intuition or personal benchmarks rather than traditional logic or rationality. They do not always conduct a mental cost-benefit analysis when making a purchase decision, but frequently take an emotional shortcut akin to ‘falling in love’. Price then becomes not a rational equation, but simply the cost of ‘falling in love’. Those that succeed do very well.
Wealthy traditionalists in a downturn may stop travelling, reconsider that new car, buy fewer luxuries, spend less on wine, go out less. They become even more conscious of price.
On the other hand, Australia’s wealthy NEOs don’t miss a beat, they just keep on spending on what they love and desire. They’re filling hot restaurants and spending more on wine and buying more champagne. They have just made the Tesla model 3 the fourth best-selling car in Australia, and they are taking trips that have a sense of purpose.
Winning in a higher interest rate environment where there is a large segment of the population struggling will require very different strategies to those that yielded the big gains in the mortgage spree
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