Consumer costs hit home

How they’re feeling, what they’re cutting back on – and why things are likely to get worse before they get better.

The resilience of relatively high earners is now being tested, while lower earners are contending with a sharp increase in the number of family members and friends they must support financially. Image: Waldo Swiegers, Bloomberg.

Big changes in consumer spending patterns were already obvious a year ago when finances started to bite, and things have worsened since then.

“Whichever direction consumers look, price increases are on the cards” says Neil Roets, chief executive of Debt Rescue. “And while there is some relief in an unchanged repo rate, the cost of living continues to climb.”

Roets says the recent (steep) petrol price hike as well as expected increases in the cost of electricity, food and other consumer goods will continue to put pressure on households.

These increases are coming at a time when consumers’ incomes have been impacted by low economic growth and increased unemployment, with the lockdowns aimed at reducing the spread of Covid-19 exacerbating an already weak situation. Many of those who are employed had to accept lower salaries for at least a few months, while small businesses, the self-employed and informal workers have seen their income-generating potential hit by the double whammy of pandemic-related restrictions and cash-strapped customers.

“Consumers need to take proactive steps to protect themselves from these financial realities,” says Roets.

Fuel costs a big issue

He maintains that the recent sharp increase of 81 cents per litre of petrol, coming after a few months of smaller increases and with more to come, will lead to higher prices of other goods.

“While the rand is performing relatively well against the dollar, which has softened the financial blow to some degree, the international price of Brent crude oil has increased and is having a knock-on effect on local fuel costs.

“This affects the whole supply chain of transport, goods and services, and adds impetus to a rising financial tide that is negatively impacting consumers.”

Roets says the minister of finance is likely to increase the levy on petrol quite substantially in his budget, due in a few weeks’ time, and that we can expect to see the price of petrol increasing quite sharply in the next few months.

He says that if the rand weakens, we are “in for some seriously expensive petrol”.

The ripple effect will be significant.

For starters, consumers continue to suffer in the face of the Covid-19 pandemic, with millions having lost their jobs during the past year as can be seen in the latest unemployment figures climbing over 30%.

“While government’s R350 grant was a lifeline for many, this has come to an end for now, meaning those without jobs or with limited incomes will feel these price hikes even more,” says Roets.

“The fact is that the cost of transport – whether a car, a taxi or a bus ride – will rise. It will make it more expensive for millions of South Africans to get to and from work or to go and seek work.”

Eskom will put further pressure on the financially stressed, with recent reports indicating that it could increase tariffs by as much as 50% to generate funds in an attempt to keep the lights on.

Buying on credit

There is also the proposed vaccine tax to consider, says Roets, adding that tough times force many people to buy food on credit, “which might [provide] some immediate relief, but has long-term consequences due to the steep interest rates it incurs”.

The most significant indicator that consumers are struggling financially is provided by the ratio of unsecured debt in relation to their disposable income.

Roets quotes figures from Trading Economics, which show that the ratio of unsecured debt to income may have increased to nearly 73% by the end of 2020.

This sentiment is reflected in figures included in Old Mutual’s annual Savings and Investment Monitor, with the latest research based on a survey of 1 500 employed people. Old Mutual notes that the 2020 survey could not be conducted face to face as normal due to the pandemic – and due to the difficulty in reaching a balanced sample of people earning less than R5 000 per month online, it instead focused on people earning more than R5 000 per month.

‘Very stressed’

“The 2020 results point to a very stressed and financially pressed South African consumer,” states the report. “Not only are absolute income levels under pressure as many take salary cuts, but demands on share of wallet are increasing as never before.

“A third of consumers find that they are having to support more people financially than they did before the pandemic.”

The report states that buffer savings – those short-term savings accounts to assist with emergencies – were already under pressure in 2019 and have been further eroded, with the resilience of relatively higher earners now being tested. The high earnings refer to people earning at least R20 000 per month.

How people feel about their finances

The report has asked the same question since 2014: How do South Africans feel in terms of how they are managing to get by?

A five-point scale ranging from ‘living comfortably’ to ‘finding it very difficult’ is used – and the results show a marked deterioration:

Source: Old Mutual Savings and Investment Monitor 2020

“While lower earners still find it more difficult than their higher-earning counterparts, the relative deterioration in ability to get by is more marked among those earning more than R20 000 per month,” notes the report.

Friends and family

The report shows a sharp increase in people having to financially support adult family members and friends. While 2019 saw an increase in adult dependants, 2020 saw an even sharper increase with the increase most prevalent among lower-income earners.

The number of respondents who indicated that they have adult dependants increased to 52% in 2020, compared with 43% in 2019 and 39% in 2018.

Debt Rescue notes that the percentage of people buying food on credit increased to around 30% last year. People are also making more use of personal loans.

“The numbers show that there was a massive 22% jump in personal loans from a financial institution and a 6% increase from micro-lenders,” says Roets. “It also showed that consumers are falling behind on these loans, with 39% reporting they could not repay their financial institution and 34% could not repay loans to micro-lenders.”

It’s worrying that consumers who are already struggling to make ends meet are turning to unsecured, expensive debt to help them make it to the next paycheque, says Roets.

“Access to existing credit facilities, such as credit or store cards, also makes it easier in the short-term, but the long-term impact is significant,” says Roets.

He says that since the later part of 2020, Debt Rescue has seen a month-on-month increase in the number of consumers seeking debt relief in the form of debt counselling.

“As the lockdown restrictions on most industries have lifted and consumers are faced with their ‘new normal’, they are facing the harsh realities of the impact of Covid-19 on their finances.

“Many consumers who have turned to credit during these difficult times of reduced or no income are now struggling to afford this additional debt burden, especially where their income has been permanently affected.”

In addition, those welcome payment holidays on hire purchases and mortgages have ended.

Cutting back

The Old Mutual Savings and Investment Monitor notes that people indicated that they are cutting back on expenses. The most popular areas of saving money include not going to restaurants, eating takeaway meals less often, and planning to travel less.

Of people earning more than R20 000 per month, 67% said they will eat out less, 62% will cut down on takeaway meals, 62% plan to reduce travel and holidays and 50% are looking to reduce spending on haircuts and beauty treatments.

What people are cutting back on

Respondents earning above
R20 000 pm All income bands
Male Female
Eating out and entertainment 67% 65% 73%
Takeaways 62% 62% 68%
Entertaining at home 58% 61% 63%
Holiday and travel 62% 57% 64%
Alcoholic beverages 53% 53% 59%
Hair and beauty 50% 45% 54%
E-hailing services 49% 49% 49%
Cigarettes 48% 48% 48%
Shoes and clothing 46% 45% 52%
Home improvement and maintenance 46% 46% 48%
Online shopping for shoes and clothing 41% 39% 46%
Nanny/childminder at home 45% 42% 42%
Online shopping for electronics and appliances 40% 39% 43%
Domestic worker/gardener 38% 41% 38%
Pre-school/aftercare expenses 42% 35% 36%
Online shopping for groceries 31% 30% 34%
DIY 32% 33% 29%
Cellphone/airtime/data 28% 30% 31%
Online TV/movies 27% 31% 28%
Transport 34% 28% 28%
Armed response and alarms 27% 28% 27%
Assistance to children and dependents 28% 26% 26%
DStv/M-Net subscription 27% 25% 26%
Food and groceries 25% 23% 28%
Children’s schooling and education 23% 22% 21%
Car and household insurance 17% 24% 14%
Accommodation 19% 19% 17%
Medical aid 13% 17% 10%
Source: Old Mutual Savings and Investment Monitor 2020

“Against the backdrop of rising fuel costs, cultivating a more frugal way of living is critical in these very tough times, not least because no one knows how long we will live with this pandemic, which has already caused so much devastation,” says Roets.

Learning to live more frugally

“It starts by reducing reliance on expensive credit [and extends] to choosing more affordable products and brands and generally cutting back on non-essential lifestyle expenses.

“The easiest [action], but possibly one of the least implemented, is to set up a monthly budget to have a clear read on expenses. Without doing this, payments and small expenses slip through the cracks and consumers don’t have a true picture of their spending habits.”

An alternative is to look at your bank or credit card statement, says Roets. “It clearly shows opportunities where changes can be made, such as cutting down on unnecessary takeouts, subscriptions to services that are barely used or where choices can be made to reduce necessary expenses such as where to buy groceries.”

Overwhelmed by debt?

Once it becomes evident to a consumer that even with changes to their budget they aren’t going to be able to meet their debt commitments, a debt counsellor can assist – negotiating with their creditors to ensure they are able to afford the necessary living expenses while also being able to repay their debt.

“By making use of this process, monthly instalments are reduced and repayment terms extended,” says Roets. “They then also receive protection against any new legal action.”

Of significance is that the Old Mutual survey was done nearly a year ago, with the next one starting soon. It will show how people’s finances have changed lately and will also include the effects of the rising cost of living and any additional taxes introduced in the coming budget.