The Human Factor | Quilter Cheviot

7 minute read

Consumers: Checking in on the humans

The bots are coming! That may well be true if, as promised, artificial intelligence (AI) transforms the way we live, work and play. When it comes to the economy and financial markets, however, humans still have some sway. Take the US economy. Humans, in their capacity as consumers, account for around two-thirds of all economic output. Hence why consumers are often referred to as the engine room of the US economy. Consumers even have market sectors named after them— ‘consumer staples’—home to food and drink manufacturers/retailers, tobacco and alcoholic beverage companies; and ‘consumer discretionary’—home to luxury and sportswear brands.

That doesn’t mean businesses can count on raking in the consumer dollar, pound or euro forever, however. For consumer behaviour is constantly evolving. Humans, those who invest, need to keep track of trends to ensure that companies serving the consumer today are best placed to continue to do so tomorrow. Below are seven themes worth keeping an eye on.

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Theme#1: Trading down and trading up

Consumers are trading down and not just those on low incomes but increasingly those in the middle-income bracket too. You only have to visit your local supermarket and spot the banners promising the lowest prices to see retail outlets are focusing on their value propositions and competing on price. And trading down is not just about buying lower cost products. Consumers are also choosing to stay at home rather than dine out. In the UK, M&S, Sainsbury’s and Tesco’s are all enjoying higher sales as consumers choose to eat premium foods at home rather than at expensive restaurants.

A similar trend can be seen in the consumer discretionary sector. The broad message from retailers and brands during the recent reporting season is that K-shaped consumer behaviour is alive and well—wealthy consumers, many of whom are benefiting from rising stock markets, are increasing their spend; while lower-income and younger consumers are cutting back. How are companies responding? By upping promotional activity.

Cost-of-living pressures are a key driver behind the trading down trend. As long as inflation continues to weigh on household budgets, K-shaped spending patterns will likely persist.

Theme#2: Geography matters

Consumers in certain countries are spending more than those in others. In terms of GDP per capita, average wages and purchasing power, Mrs Smith in the US is better placed than Mrs Watanabe in Japan, Madam Michu in France or Aunt Agatha in the UK. The European consumer, for example, is more exposed to higher oil prices and higher taxation. Emerging markets outside of China (where a property downturn and high levels of unemployment have held back consumers) are a bright spot, notably India. Emerging markets tend to have younger, growing populations as well as a rising middle class with more money to spend. All music to the ears of a consumer staple or discretionary company.

Beware of over generalising at the country level though. Local geography matters too. A visit to the downtown financial district of Boston might give the impression that all is fine in the US. But that doesn’t mean middle- and lower-income consumers just a few blocks away are not struggling with the cost of petrol or the weekly grocery bill. Remember that K-shape pattern.

Theme#3: Changing demographics

Population growth across the world is slowing down. There are several reasons for this. In the US and UK, a clampdown on immigration has led to a halving in population growth in recent years, while the origins of China’s shrinking population can be traced back to the late 70s/early 80s one-child policy. Declining populations directly impact consumer sectors. Food, drink and tobacco companies have relatively low absolute growth rates at the best of times, so losing half a percentage point’s worth of extra consumers each year leaves a hole. Another trend is ageing populations. Fewer workers having to support greater numbers of retired people generates fiscal pressures which likely leads to higher taxes.

Changing demographics does throw up opportunities, however. Different demographic groups like different things. Companies that come up with products that resonate with individual categories can therefore benefit.

Theme#4: The age of social media

Social media is driving a need for all things new. Satiating more demanding consumers has become a never-ending task for food and drink companies, brands and retailers alike and leaves them more exposed to shorter fashion or product cycles. To succeed today, businesses need to deliver new products, offer value, and have an effective omnichannel formula in place. They must also move faster on product development so that they adapt quickly to shifting trends.

Theme#5: The rise of health and wellness

How to gauge the strength of the health and wellness trend? Look at what people are buying as this ought to show up in healthy food and drink sales. This is what we are seeing. In food, consumers are prioritising higher-quality products. Helpfully, nutritional foods tend to carry better margins which go some way to offsetting the reduction in calorie consumption being seen. In the soft drinks industry, zero-sugar formats are growing strongly. Global sales of Coca Cola’s zero-sugar Coke, for example, are growing 16% a year. That compares to total group sales growth of 5%, implying a falling share for the full-sugar variant.

It’s a similar story with alcohol and tobacco. The amount people are drinking has fallen: 24% of adults in England said they had avoided alcohol over the previous 12 months (source: NHS’ Health Survey for England for 2024), an increase on the 19% figure recorded between 2011 and 2022. Age is a factor: 39% of young men said they had abstained from alcohol compared to 16% of men aged 65+; while 31% of women aged 16–24 were non-drinkers compared to 17% of 55–64-year-olds. Once again, companies are adapting. This time by introducing smaller, more ready-to-drink packaging, reducing the alcoholic content of certain drinks, and offering zero-alcohol options. In tobacco, sales of reduced-risk products (vaping, heated tobacco and nicotine pouches) are growing, whereas cigarette volumes, particularly in developed markets, are declining.

The takeaway? Those companies that have a plan and innovate are able to grow sales in the current environment.

Theme#6: A more discerning consumer

Consumers are redefining what value means to them and are questioning the value proposition of each purchase. A shift in spending patterns, away from products to experiences, such as luxury travel, hospitality, and cruises can be seen and this has implications for the luxury goods industry. Thanks to expanding globally, branching out into accessories and tapping into rising wealth in Asia and China, the sector had been growing at about 5%-6% per annum. Growth has however slowed for a number of reasons. Own goals such as pricing out aspirational buyers through aggressive price increases hasn’t helped. Neither has a challenging macro and geopolitical environment. The luxury sector is having to adjust to the new environment it finds itself in.

Theme#7: There’s no getting away from AI

Artificial intelligence (AI) remains one of the most important long-term themes across all sectors. That said, the technology is generating evolutionary rather than revolutionary change in the consumer segment. For while consumers are using AI to research products/solutions before making a purchasing decision, companies themselves are using AI to improve forecasting, merchandising, labour scheduling, and personalisation. True these can be described as incremental benefits but, given the low margins generated in certain areas of the consumer sector (food retail, healthcare products), even small gains can translate into meaningful bottom-line progress for companies.

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