A look at changes in consumer spending behavior.
| Highlights:The post-pandemic period has shown evidence of changes in consumer spending behaviorConsumer spending has recovered reaching P16.7 trillion in 2022, 17.1% above the 2019 figureThe numbers show evidence validating two themes – consumers spending more time at home and focused spending on essentials and necessitiesChanges in consumer spending behavior impacts industryLosers: Alcohol and Tobacco, Clothing and FootwearEarly Winners: Education, Health, Housing, Providers of Miscellaneous Goods and ServicesUnstable: Restaurants and Hotels, Transport, Recreation and Culture |
The Black Swan Theory
Many of us may be familiar with the theory of Black Swan events developed by the author and mathematical statistician, Nassim Nicholas Taleb. Taleb’s black swan theory refers to “statistically unexpected events of large magnitude and consequence and their dominant role in history”. The pandemic pretty much fits that description.
Black swan events can lead to changes in the way we do things owing to the experience and lessons learned from going through these events. Many of these changes are a rational response to a traumatic and difficult episode, while others can be taken as an illogical overreaction.
Human behavior: run from pain, run toward pleasure
In the Netflix short series, Painkiller, about the beginnings of the opioid crisis in the United States, the lead character in the movie, Richard Sackler has this line which bears some thought. The line which underlies his business philosophy goes like this – “(a)ll of human behavior is essentially comprised of two things: Run from pain, run toward pleasure. If we place ourselves between pain and pleasure, we will no longer have to worry about money again.” From there, the scourge of oxycontin began.
I quote that line as a prelude to what can be taken as typical human behavior. Human beings tend to become overprotective and retreat to their shells and comfort zones during periods immediately after traumatic events. As these events recede into the background and “normalize”, people begin to take more risks in pursuit of the other end of Mr. Sackler’s quote – running toward pleasure.
Another black swan event which somewhat approximates this sequence of behavior is 9-11. Travel, particularly recreational travel, fell off a cliff in the months following 9-11. As time went on, it recovered as people reverted back to their prior tendencies and behaviors in the pursuit of pleasure.
The pandemic and spending pattern changes
So now we come to the pandemic. Economic numbers seemingly show some changes in spending patterns of Filipinos post the pandemic. A cursory glance at these numbers shows that spending on necessities such as food and shelter have taken on a relatively bigger portion of the Filipino’s budget. On the other hand, spending on non-essential items such as restaurants, transportation and recreation have taken a noticeable dip in 2022 (and prior years) relative to the last pre-pandemic year of 2019.
Consumer spending has recovered and is growing
Before proceeding, we note that over-all consumer spending, as represented in the Household Final Consumption Expenditure (HFCE) Report of the Philippine Statistics Authority, has more than recovered from its pandemic dip. As the chart above shows, consumer spending reached P16.7 trillion in 2022. This is 17.1% above the P14.3 trillion recorded in 2019. This follows a major dip in 2020 to P13.5 trillion and the slight recovery to P14.6 trillion in 2021.
The rest of this article will go through the nuances that underlie this headline number. It seeks to quantify and answer the question – what exactly are Filipinos spending on? We will also seek to highlight changes in spending behavior and provide some insights as to whether these changes are permanent or temporary.
The Consumer Spending Pie
Let us begin by looking at the breakdown of how Filipinos spent their money in 2022 (see chart below). As has always been the case, Food and Non-Alcoholic Beverages accounted for the biggest slice of consumer spending at 38%. This was followed by Miscellaneous Goods and Services (14%), Housing, Water, Electricity, Gas, other Fuels (12%), Transport (9%) and Restaurants and Hotels (7%) completing the top five spending components.
As our first look on possible changes, we compare this consumer basket breakdown with what it was in 2019 – the last pre-pandemic year.
The chart above shows some significant and some not so significant changes.
Food and Non-Alcoholic Beverages accounted for even more
Spending on Food and Non-Alcoholic Beverages shows the biggest upward change. In 2019, it accounted for 33.8% of the consumer basket. In 2022, it was up to 37.9% or a change of +4.1%. Others which took up a bigger slice of spending included Housing, Water, Electricity, Gas, other Fuels (+0.9%), Miscellaneous Goods and Services (+0.7%), Health (+0.3%) and Communications (+0.2).
Spending on Restaurants and Hotels, Transport accounted for less of consumer basket
On the flip side of the coin, spending on Restaurants and Hotels fell to 6.9% of the consumer basket in 2022 compared to 9.6% in 2019, a decline of 2.7%. Other items which took up less of consumer spending in 2022 included Transport (-1.6%), Recreation and Culture (-0.8%), Alcohol and Tobacco (-0.4%), Education (-0.3%), Furnishings, Household Equipment and Routine Household Maintenance (-0.3%), and Clothing and Footwear (-0.2%).
Miscellaneous goods and services
Spending on Miscellaneous Goods and Services was and continues to be the second largest component in the consumer basket. It also accounted for the third largest increase in terms of how much it accounts for consumer spending. This being the case, it would be good to have an idea of what comprises this group of items.
The largest item is Other Appliances, Articles and Products for Personal Care. This item accounts for just over ¾ of the Miscellaneous Goods and Services component. Other items included here are Travel goods and articles for babies and other personal effects, Hairdressing, Personal grooming treatments, Jewelry and watches, Repair and hire of jewelry, clocks and watches, and Other Services not elsewhere classified.
Inflation Effect
The fact that an item becomes a bigger part of consumer spending doesn’t necessarily mean that they are buying more of that item. The other key variable here is inflation – is the increase in spending on an item a result of them buying more quantities of that item or is because the price of that item has increased?
Conversely, is the decline in the share of spend of an item in consumer spending a result of people buying less quantities of that item or is it because the price of that item has gone down?
Current vs Base Year Prices
Economic data is normally presented in 2 formats. The first format calculates the data using current prices. This is the data that we have looked at so far. The second format calculates the data using base year prices for all years subsequent and prior to this base year. As an example, Philippine economic data now uses 2018 as its base year. This means that the data is calculated using 2018 prices as its basis. What this does is eliminate the effect of inflation on the changes in the data. Another way of looking at this would be that base year calculations reflect the change in quantities.
| Share of Consumer Spending | ||
| 2019 | 2022 | |
| Food + NAB | 33.9% | 37.4% |
| Alcohol + Tobacco | 2.2% | 1.5% |
| Clothing, footwear | 1.9% | 1.8% |
| Housing | 11.6% | 12.7% |
| Furnishings | 3.0% | 2.8% |
| Health | 4.0% | 4.4% |
| Transport | 10.8% | 8.0% |
| Communication | 2.7% | 3.2% |
| Recreation and culture | 2.2% | 1.5% |
| Education | 5.36% | 5.42% |
| Restaurants and hotels | 9.5% | 7.0% |
| Miscellaneous | 13.0% | 14.2% |
* Compounded Annual Growth Rate
The table above now shows the changes in the share of items in consumer spending using 2018 prices. It reflects the same pattern as with the use of current prices except for Education. Using current prices, the share of Education went down by 0.3% whereas when we look at this using base year prices, the share of Education spending went up slightly by 0.06%.
I would contend that using base year price data is a more persuasive indication of consumer spending behavior. Buying more of (as opposed to paying more for) something is more reflective of a choice that a consumer has made.
The data also seems to provide evidence of certain themes that have developed since the pandemic happened. These themes include:
- The choice to stay home more; and.
- Focusing buying on essentials and necessities
Staying home
The work from home phenomenon has resulted in the increased spending on Food and Non-Alcoholic Beverages, Housing, Water, Electricity, Gas, and other Fuels, Miscellaneous Goods and Services and Communication. On the other hand, this has also led to the decrease in spending on Restaurants and Hotels, Transport and Recreation and Culture.
Focused buying on essentials and necessities
The items mentioned in the first theme resulting from staying home are for the most part items that we could classify as essentials and necessities. Those same items which saw a cut in spend under the first theme. would also fall under the category of non-essentials.
Add to this the reduction in spending on Alcohol and Tobacco, and the possible delaying of spending on Clothing and Footwear and Furnishings which have also seen a decline in the share of consumer spending.
Education and Health
Purchases of Education services have remained practically the same. Spending on Health, however, has seen a noticeable increase in its share of household spending.
Industry impact
The change in spending patterns and behavior has obviously had an impact on industry. The question is whether these impacts are going to be temporary or permanent.
One way to gain some insight into this is to look at spending growth rates pre- and post-pandemic. The charts that follow show 5-year Compound Annual Growth Rates (CAGR) of spending for the periods between 2014 to 2019 and from 2017 to 2022. These longer time frames minimize the impact of bias or possible anomalies that you may get from a shorter analytical time frame.
Some items immediately catch your attention when looking at this chart.
Obvious pandemic impacts
Spending on Restaurants and Hotels has gone from being the fastest growing component of the consumer basket in the pre-pandemic period to becoming one of the remaining laggards. The same is true for Transport and Recreation and Culture.
Clothing and Footwear and Alcohol and Tobacco which were already struggling pre-pandemic have continued to struggle leading to the thought that these face long-term declines.
Losers
The items on the right side of the chart – Clothing and Footwear and Alcohol and Tobacco appear to be in a period of long-term secular declines as they both showed either insignificant growth or substantial contraction pre- and post-pandemic. As such, it is likely that companies in this sector will continue to be unattractive going forward.
Early winners
Providers of Education, Miscellaneous Goods and Services and Health, Information and Communication and Housing appear to be in the best position to return to sustainable growth paths.
Unstable
Restaurants and Hotels, Transport and Recreation and Culture bear watching. Businesses in these industries have suffered most during the pandemic and continue to struggle to return to their pre-pandemic levels. It is probably unreasonable to conclude that they are in a secular decline. The more reasonable prognosis is that they will recover but that it will take time. The other question is whether they will return to their strong growth levels prior to the pandemic.
Will, when and by how much will people return to spending for the pursuit of pleasure?