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When a change of government is time to buy a new car

May 16, 2017

Election results offer a window into consumer confidence

The terms 'consumer sentiment' or 'consumer confidence' are frequently employed by politicians and the media, as pointers towards where the economy might be heading. But unlike notions such as inflation or GDP, these concepts are much harder to quantify.

New research from Nalini Prasad, a lecturer in the school of economics at UNSW Business School, together with Christian Gillitzer from the Reserve Bank of Australia (RBA), seeks to measure how consumer confidence changes around Australian federal elections, and to what extent these changes in confidence translate into actual purchasing decisions.

"There's a huge amount of media attention on consumer sentiment," says Prasad. "But does this information really tell us anything that goes beyond, for example, what we already know from unemployment figures?"

Prasad and Gillitzer's research utilises unique Australian consumer sentiment survey data, which records a participant's voting intentions.

Through this, the researchers are able to demonstrate that, immediately after federal elections with a change of government, consumers self-identifying as supporters of the winning party report substantially more optimistic beliefs about expected economic conditions than supporters of the losing party. Importantly, these changes in sentiment do not coincide with any major economic events.

The research then attempts to quantify these sentiments by looking at purchases of new cars in the wake of federal elections. It finds evidence that these intentions did indeed turn into actual purchasing decisions, for those consumers whose preferred party had come into power.

Data reveals that following changes of government in 2007 and 2013, motor vehicle purchases increased by relatively more in postcodes with a greater share of votes for the winning party. 

'When people are confident in the future economic outlook, it makes sense that they're more likely to spend'

– bessie hassan

Information advantage

Prasad believes that quantifying consumer confidence can be useful on two levels. First, for policy-makers such as Treasury or the RBA, it can give them an additional and different metric of what is going on in the economy.

"If consumer sentiment is low, even if the fundamental indicators like employment or GDP are strong, our research suggests that it's worth paying attention to the weak sentiment," she says.

"In the 1990s in the US, the economy looked strong, but consumption fell, and it's thought that consumer sentiment had a role in this."

Second, in the business world it's clear that if consumers are more confident, then businesses should expect more sales, and businesses that could anticipate these changes could exploit them to their advantage.

But that said, Prasad expects changing consumer sentiment to have the most influence on shorter-term decisions relating to marketing, rather than longer-term decisions relating to production or investment.

For Bessie Hassan, head of PR and money expert at comparison website finder.com.au, Prasad's findings certainly chime with the reality of her world.

"When people are confident in the future economic outlook, it makes sense that they're more likely to spend," she says. "Perhaps this is also tied to the idea that they will be 'looked after' by the government in power."

As for marketers making practical use of Prasad's research, it would depend entirely on the ability of the marketer to run a localised marketing strategy.

"A 'one-size fits all' won't work," says Hassan. "You'd want an inclusive strategy, but you'll have to go a few steps backwards, focusing on those areas that are in favour of the political party in power, looking at the seats they hold."

Localised campaigns

A localised strategy could dovetail with activities that marketers already undertake, such as collaborating with councils, community groups and schools.

"This sort of involvement helps to build trust," Hassan says. "It shows you're interested in communicating with them as people – not just trying to sell them stuff."

But for Hassan, whether or not this kind of strategy would work depends entirely on what it is you're trying to sell. (The marketing of some products – such as residential real estate – is already a very local process.)

"The motivations for purchasing a new vehicle, though, would be similar for the majority of consumers, so this wouldn't warrant a highly localised marketing campaign," she says. "Their reasons for buying a new car are homogeneous.

"A localised poster campaign might work, but that would be backed up by a national campaign."

One product that Hassan believes may lend itself to a purely localised campaign is travel, such as holidays and cruises – especially if it was possible to connect the campaign to information about the demographics of an area.

 Additionally, Hassan thinks the food and beverage industry may also lend itself to localised campaigns, such as restaurants offering halal food in Muslim-populated areas.

"When people feel positive about the future, such as when there is limited inflation, good employment opportunities and economic growth, people are more inclined to spend, as they believe the macroeconomic environment is stable, and thriving," says Hassan.

"Further, they can feel confident in their purchasing decisions as they know – and trust – that their national government will pursue policies that will ultimately improve their livelihood." 

'There's a lot of information out there, and my research shows that consumer sentiment is an indicator that people should pay attention to' 

– nalini prasad

Potential buyers

"Marketers have long debated whether consumer confidence is a strong enough metric to predict actual purchase behaviour," says Renata Freund, founder and director of market research and marketing strategy consultancy, Honeycomb Strategy.

"This study gives researchers validation that incorporating consumer confidence into their analysis and research findings is a valid way to understand and evaluate consumer sentiment, knowing that it is linked to actual purchase behaviour," Freund says.

"The results suggest that, at least for the automotive industry, there is a real and measurable impact on actual purchase behaviour. What's still missing is an understanding of how this relates to other purchase decisions – in particular, any smaller purchase decisions that a household makes on a more regular or less considered basis."

Freund believes that it's sectors that require greater monetary investment by consumers that may be best able to leverage the findings.

"Whether it's a luxury handbag, new tech or time to upgrade household appliances, communicating to consumers at times of peak confidence will help marketers convert considerers into buyers," she says.

"Conversely, commoditised industries or consumer 'must haves', such as utility services, are unlikely to be able to positively benefit from the findings. The same can be said for services such as healthcare, which see consumers respond to an immediate need."

For many brands, however, targeting consumers based on their attitudes and online behaviours may serve as a more effective way to reach potential buyers.

"Digital channels allow marketers the luxury of tapping into consumers who are already primed to buy, lessening the need to rely on any given geographic location," Freund says.

"This strategy will often serve as a cheaper and more effective way to engage with consumers that are in the market for a particular product or service, without the need to market to an entire geographic area in the hope of reaching the few potential buyers that may exist."

Concludes Prasad: "Consumer sentiment matters. There's a lot of information out there, and my research shows that consumer sentiment is an indicator that people should pay attention to." 

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