What you need to know:

• Brands only chasing value-seeking customers in the current downturn are snookered – a quarter of the population, wired psychologically to spend differently, are driving the majority of current discretionary spending, according to Roy Morgan’s Neo segment.
• Combank iQ’s data pool of 7 million bank customers is presenting similar consumption patterns although even essentials – insurance, telcos – are being hit differently to previous downturns.
• Tony Pearson, CEO of Australian mattress maker, AH Beard, developed a two-pronged premium and value strategy two years ago chasing Neos at the top end – it’s working. Neos are keeping margins up for the company in higher price points as the consumer bedding market declined circa 25-30 per cent in April.
• But Pearson says Neo’s have to be treated and spoken to differently – less price-off, more experience and a narrative.
• The upshot? Brands need to play to premium and value, simultaneously – there is a way.
• Listen to unfiltered, unabridged podcast here for the lowdown on managing the two-speed consumer economy.

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Stange days

The CEO of AH Beard, Tony Pearson, has already discovered what every brand owner is now coming to terms with – a fractured, two-speed consumer economy in which premium lines are holding up while value products are behaving badly. AH Beard has been chasing the spend-happy Neos for two years and the results are going to plan – demand for a $3,000 AH Beard mattress is holding up while value lines in the circa $600 range have "gone off a cliff".

It's the tale of a two-speed consumer economy at play in Australia. Commbank’s analysis of 7 million account holders last month painted the clearest picture yet that millions of Australians are cutting back on essentials as rate rises bite – though most are still spending on travel, entertainment and experiences – with a stark fault line between crunched young and cashed-up old.

But deeper analysis shows a more nuanced picture – and it validates Roy Morgan’s near two-decades worth of segmentation: Circa 25 per cent of the population – across age groups – are driving 50 per cent of national discretionary spending. Social scientist Dr. Ross Honeywill, who has a joint venture with Roy Morgan, calls these free-spending consumers ‘Neos’, because they represent a ‘new economic order’ – and in the current economic cycle they’re staying true to form. The spending split has profound implications for every brand in Australia – but particularly those that have spent the last low-interest decade chasing the price-driven mass market. Per Commbank iQ innovation and analytics chief Wade Tubman, marketers without “stratified” or multi-layered brand strategies “might be starting to feel the walls are closing in.”

Blend premium and value

Tubman and Honeywill think brands must blend premium and budget product, pricing and promotion strategies to successfully navigate choppier waters ahead – because the effect of latest rate rises have not yet been fully felt. Tony Pearson, CEO of AH Beard, an Australian mattress maker fighting for a fatter slice of a $1.2bn market conditioned for decades on price-drive promotions, says the two-speed Neo market is playing out exactly as Roy Morgan, Ross Honeywill and now Commbank have called it. Per hard sales data over the last six months, cheaper mattress sales are down as have-nots hold off, while premium mattresses are up as the haves plump to wallow in their own financial comfort. Meanwhile, hotels are investing almost en masse in new stock to tap the post-Covid ‘revenge’ experience and travel spending that still has some way to play out – though Tubman, Honeywill and Tubman all predict the experiences gravy train will slow within the next 12 months.

In the meantime, they suggest marketers diversify – and if they only target one cohort within comms, reckon the freer-spending Neos deliver segmental double duty and better bang for buck.

“We’re starting to see people actually think about … experiences being the new essentials,” says Tubman. “But that money has got to come from somewhere – and we’re starting to see consumers [with less discretionary income] start to nip and tuck and pare back on some of their essential spending.”

Insurance and telco are two such sectors.

“Most people aren’t willing to drop their health insurance or drop their car insurance, it's just too risky,” per Tubman. “But what they're doing is things like cutting back maybe on their health insurance extras, or increasing the excess on their car insurance, because all of those type of things drop a few extra bucks into the wallet.” For telco, meanwhile, “we're seeing some consumers choosing to [switch to] a tier two provider”.

Meanwhile, spending on clothing and household goods is falling – at least in price driven segments, says Tubman. “If we consider the whole market – the budget, mainstream, premium spectrum – the weight of the money lives in the mainstream to budget area,” he adds. “We’re definitely seeing contraction. Apparel is down about 5 per cent, which after we take into inflation is probably down 15-10 per cent [in real terms], and household goods down around 11 per cent.”

That’s the squeezed middle, and particularly those aged 20-30 with high housing costs, facing their new economic reality, per the Commbank-Quantium data.

Vintage spenders

“But there are definitely groups out there seeing the opposite trend, primarily the over 55s, “not just keeping up with inflation and spending more on more expensive goods, but actually buying more. They are increasing their consumption”, per Tubman. The over 65s, he says, realise they can’t take it with them. “They are dramatically increasing [spend].”

The fault line, he stresses, is more granular than boomers and late stage gen Xs, with big fat properties bought relatively cheaply and generous super funds. There are “Neos within the younger age groups that still have spending power,” says Tubman, and there is “danger” in simply aggregating averages. “So within those categories [such as apparel and households goods] there are going to be premium segments where we will see the opposite effect, where the people with high spending power are willing to continue to either trade up or are not willing to sacrifice quality.”

Tubman forecasts more pain to come for those already under pressure. Interest rate rise, he says, don’t look like they are going to be stopping, and the current situation is not yet fully priced in.

“Banks follow RBA rise quite closely. But the actual repayment that consumers repay, might actually change two or even three months down the track. So the June rate rise may not be coming through to consumers until August or even September. So there is definitely more to follow through. That means we're going to be seeing some of these younger age groups … with high LVR mortgages, looking for tricks and tips to cut back on their spending.”

But rate rises also present some balance.

“At the opposite end of the spectrum, the over 65s, in particular the self-funded retirees, their purchasing power just went up,” says Tubman, and he reiterates that money and spending power does not fall equally into demographic buckets.

Affluence not a signal

Ross Honeywill started working on the theory and psychology of Neos at the end of the dotcom boom when he ran KPMG’s Centre for Consumer Behaviour across Apac. Since then, he’s developed a Neo algorithm that spans 194 mindsets and that is “deeply guided by neuroscience”.

What it boils down to, per Honeywill, is that Neos – circa 25 per cent of the population but responsible for upwards of 50 per cent of discretionary spending – buy things because they want them, not specifically because they need them. While everybody – Neos included – want to pay the best price, price-driven advertising and promotion is not the way to attract them, says Honeywill, and will in fact turn them off.

On the flip side to Neos is a group called ‘traditionals’, with circa 10 million of these price-driven, rational buyers in Australia, per Honeywill. “For the traditionals, everything starts and ends with price. Whereas for Neos, if they can’t fall in love, if there is no emotion attached to it, they are not going to spend their hard earned.”

Honeywill says it is important for marketers to understand that motivational difference versus spending and demographic profiles – both of which on their own are relatively useless. For example, he says some 90 per cent of Neos are present in Roy Morgan’s ‘big spender’ category, whereas only 6 per cent of Australia’s traditional mindset consumers are also in the ‘big spender’ category. Many more than 6 per cent of that 10 million are affluent and wealthy, says Honeywill, “but they just don’t really like spending”.

Neos are recession fighters

Meanwhile, free-spending Neos, he suggests, are “pulling the whole population up and keeping it out of recession”.

Tony Pearson, CEO at mattress maker AH Beard, says the Roy Morgan personas and the Commbank data are bang on the money.

Per the firm’s sales data: “At the back end of January we really started to see a tightening in demand. That deteriorated in February and into March and April was one of the biggest drops I’ve seen in a comparative period for a long time – we’re talking about the retail [bedding] consumer market being down 25-30 per cent.”

While there was some improvement in May, he agrees that rate rises are unlikely to prove positive.

But he says the shift to entertainment, travel and experiences unpacked in the Commbank iQ data crunching is playing out in the AH Beard’s B2B business – while the consumer segment is down in volume terms, the hotels are buying a lot more premium mattresses to attract higher spending customers with AH Beard demand “up significantly” from hoteliers.

But Pearson saw that coming. He met Roy Morgan CEO Michelle Levine and Ross Honeywill two years ago – and quickly bought into the Neo doctrine. He says it has literally played out before his eyes.

“What I particularly liked was it actually helped us explain and very, very clearly articulate what we were seeing in our retail distribution channels and explain differences in in demand activity and cycles,” says Pearson, unpacking sales and segment data – Neos and traditionals – to prove it.

“If I go back to September '22, and I have a look at the end of that quarter. What we found was Neos were 46 per cent more likely to purchase a mattress in that period.”

As the general market tightened, he says, “the likelihood of a NEO purchasing actually went up. So by the time the December quarter came around Neos were 49 per cent more likely to purchase a mattress”.

That’s great, says Pearson, “but not great if your total volumes are coming off”. However, it gives the firm a better ability to manage margin and revenue – and the firm has the breadth of range and customer to plan based on the demand patterns it sees coming through.

10m Traditionals v 5m Neos

“The positive news across those periods was that the demand from the Neo market at the end of September last year went up 32 per cent while the traditionals came off 2 per cent. By December, the demand was still up for Neos, it was up 11 per cent. But now you've got the traditionals coming off at a faster rate, down 13 per cent,” says Pearson.

“Over the top of that data we could watch our price segmentation – we have mattresses that retail in Australia between $699 and $25,000 but the large segments are below $1000, $1k-$2k, $2k-$3k and $3k-plus.”

“In that category of $2,000-plus and $3,000-plus we have not seen a decline at all in terms of volumes, if anything, they're marginally up.”

Below that, he says, some customers are delaying or looking to trade down – particularly if there is a long weekend coming. “Any time where there is perhaps an additional public holiday and increased competition in travel… we see retail consumer demand for household goods like mattresses reduce.”

In the two years since connecting with Roy Morgan and Honeywill, AH Beard has changed its comms to focus more on Neos and a premium experience. Pearson says it performs a kind of double duty across both the Neo buyer and the traditional. “But the reverse is not true,” he suggests.

“The mattress consumer market typically has been price-led: ‘50 per cent off, purchase now’ – and it’s often shouted at the consumer. A traditional may hear that and won’t necessarily be put off. But a Neo buyer would be put off. So we are very conscious about how we present information about our brand or the products, because Neos want to self discover. They want to actually go through an experiential process of learning more about your brand and your product, whereas a traditional maybe wouldn't,” says Pearson. “So we don’t need to change the product – we have enough breadth in the range. We just change the language and the channel of communication and the ways that the consumer can interact with our brand.”

AH Beard’s sales data and category analysis suggest that strategy is working, given there are broadly 5 million Neos in Australia versus 10 million traditional buyers.

“Do we over index on Neos within our brand? Yes we do. If we look at the $2,000-plus [mattress] category, in the December quarter period, the Neo buyer accounted for 39 per cent of the volume for that segment. The traditional buyer accounted for 40 per cent of the volume – but they are double the [Neo] population,” says Pearson. “Then if I look at AH Beard’s performance in that category against my competition, yes we are performing at a higher rate.”

Two-speed or bust?

For marketers navigating the weirdness of current market dynamics, a two-speed strategy is critical, per Tony Pearson, Ross Honeywill and Commbank iQ’s Wade Tubman. For the foreseeable, they think going upmarket is the smart play.

“Neo Audiences purchase at a higher value and they purchase more often. So any time you’re in a depressed market you absolutely are looking for the highest possible return off reduced demand,” says Pearson. “We have six manufacturing centres and any manufacturer also requires volume. So what we’ve been able to do is be a little bit more strategic around the balance between volume versus margin return and then understand exactly how to communicate with the proportion of the market that has a higher propensity to spend at those rates.”

Commbank iQ’s Tubman says luxury manufacturers “the Pradas and the Louis Vuittons” have little to worry about as the top end of town keeps spending, while those like AH Beard playing across the premium and price-driven segments, with “good, better, best” product spectrums and price points have all basis covered.

'Stratify' brand strategy  

But marketers without “stratified” or multi-layered brand strategies that have chased the price-driven mass market “might be starting to feel the walls are closing in.”

Honeywill says price is still important in attracting more premium buyers. “Don’t imagine that Neos are mad spenders for the sake of it,” he says. “Everyone wants the best price. But for people with a traditional mindset, it starts and ends with price. For Neos, it’s just the cost of falling in love.”

Honeywill underlines Pearson’s point around Neo comms strategies working to attract the price-focused traditional buyers but not vice versa. He thinks marketers therefore need a two-speed comms strategy.

“To have a value proposition and a brand proposition for Neos is a lot more sensible and safer, particularly a market like this, than it is to just be going on price and losing your margin,” he says. “A premiumisation strategy is absolutely crucial in the next 12 months to two years.”

Worse to come

Commbank iQ’s Tubman agrees a two-speed strategy is critical – given the bank’s data suggests there is further pain to come.

“The message I have out of this is it's really important to understand like, where your brand sits, where your business sits, and make sure that you're pivoting your strategy to those customers that are going to be the haves, while making sure that you've got not avoiding the have nots,” per Tubman.

“Make sure you've got the right strategy at play at play, because the most recent data we're looking at is showing this trend is going to continue. Just sort of playing out a brand strategy that doesn't recognise that… could make the situation worse in back half of this year.”

Pearson thinks ‘revenge spending’ on travel and experiences will soon start to drop off, with knock on implications for his hotel sales. “

There has been pent-up demand for the last three to six months. But arguably, those credits that were going into airline travel and potentially hotels, a lot of those expire come 30 June. So I think we’ve seen a bit of a spike in this half. I don’t expect it to return to pre-pandemic levels … but I don’t think it will be maintained at the current rate.” He predicts a tapering of demand over the next six to 12 months.

Commbank iQ’s Tubman agrees. “There has to be an end to all this [travel] catch up. I do see in the data that travel and experiences will continue at a higher level than pre-Covid levels … But we see that returning to a new normal,” he says.

“If it continues like this, there will be no one left to do any work.”