What can we learn from consumer confidence (case of Ukraine)

1

Ukraine: What can we learn from consumer confidence?

2

The approach

3

Consumer Confidence Index (CCI) is one of the leading indicators reflecting how people feel themselves in a particular period of time. In short, it is an aggregated index of how people evaluate their current personal wellbeing, their expectations regarding future wellbeing, as well as their short-term and long-term expectations about developments of the national economy. The index is measured based on consumer surveys regularly conducted by GfK Ukraine.The CCI clearly translates into general attitudes and behavior of people towards societal processes and consumer behavior in majority of markets. In general, the higher the index, the more optimistic people are. However, the index dynamics itself does not reflect peculiarities of consumer behavior as optimism or pessimism can have different shades. We tried to look deeper into consumer confidence and analyze factors affecting consumer optimism or pessimism. These might help us to see how the consumer evolves and what can be expected for the future in terms of consumer behavior.

From Consumer Confidence to Consumer Behavior

4

Our analysis revealed that more than 90% of the CCI dynamics is explained by consumer reactions to changes in the following indicators or processes which might be directly observed by an average person in the country*:

- real household incomes- consumer inflation- exchange rate of the national currency- political and societal processes, situation in the country overall

While the first three are reflected particularly in the national statistics, it is rather tricky to measure the last one (acuteness of the general situation in the country including politics, society, conflict in the East, etc.). For the sake of our analysis, we assumed that the «hotter» the situation in the country is, the more people are interested in knowing more about it. Therefore, we used Google Trends statistics on Internet searches about news in Ukraine as a proxy for acuteness of the general situation in the country. While the statistics has its limitations, it still clearly reflects and correlates with the development of the situation in the country (Politics and Society Index).

Drivers of Consumer Confidence

* - Type of study: Econometric modelling

5

Key results

6

Consumer Confidence Index

2009 2010 2011 2012 2013 2014 2015 2016

Source: GfK Ukraine

Slight gradual recovery of Consumer Confidence after deep drop

7

2009 2010 2011 2012 2013 2014 2015 2016

Consumer Price Index Real Incomes Exchange rate (UAH vs USD)

Sources: 1) State Statistics Committee, 2) NBU

Index, Jan 2009 = 100 Index*, Jan 2009 = 100 Index, Jan 2009 = 100

* - To show the level of income, the index of real salary was used

… is in line with some stabilization in key economic indicators observed by consumers

8

Politics and Society Index

2009 2010 2011 2012 2013 2014 2015 2016Source: Google Trends (number of web searches of ‘news’ in Ukraine)

… and moderate stabilization in political and societal life in the country, especially compared to 2014-2015

9

Impact on Consumer Confidence

Real Income positiveConsumer Price Index negativeExchange Rate of national currency negativePolitics & Society Index (= acuteness of the general situation in the country) negative

Drivers of Consumer Confidence: higher income – more optimism, inflation & devaluation – more pessimism, ‘No news is a good news’

Source: FPA

10

What was and is the most important for consumer moods (strength of factors impact) Period Explanation2009 During this crisis year, inflation was the most important factor affecting consumers,

followed by the level of wellbeing. Involvement in the country life was moderate.2010 – middle of 2013

Income became a smaller issue, while involvement if the country life reached its minimum. Inflation turned to be an even bigger issue.

end of 2013 -2014

The only period when the situation in the country was even more important than personal incomes. Economic situation became significantly less important compared to the country life.

2015 - 2016

Exchange rate became a more important driver of consumer moods, while the importance of personal wellbeing started to dominate. Importance of inflation declined, while involvement in the country life decreased and stabilized. Compared to 2009, economic turbulences during the past two years reveal different reaction of consumers: smaller importance of incomes vs inflation in 2009 meant that consumers were upset but still having financial reserves, while in 2015-2016 ‘the safety pillar’ started to disappear.

11

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%Politics & Society Index Real Income CPI Exchange Rate

2009 2010 2011 2012 2013 2014 2015 20162009 2010 2011 2012 2013 2014 2015 2016

Relative importance of factors in driving CCI

Source: FPA

12

The sum of absolute impacts of all factors on consumer confidence reflects to what extent consumer moods are vulnerable to changes of factors. In other words, the bigger the reaction of consumers to factors changes, the more ‘nervous’ they are, the more quick and sharp they are in their reaction to changes in the environment. On the opposite, the smaller the indicator is, the more ‘calm’ consumers are (e.g. the same income decline will upset them less as measured with CCI).Lets call the indicator Consumer Unrest Index (CUI)

Understanding societal unrest: explanation

13

0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

sum elast and sobitia

2009 2010 2011 2012 2013 2014 2015 2016

Consumer unrest: Downward trend but still very high

Consumer Unrest Index

high

low

Source: FPA

14

Consumer confidence is affected by the acuteness to the situation in the country overall (public issues) and things which are relevant personally for the consumer (private issues). Normally, people care more about their private interest & are more vulnerable to changes in private issues.In other words, decline in a personal income (private) will upset majority of people more than general events in the country (public). What is more important is relative importance of public issues vs private issues (to what extent people are skewed towards pursuing private interest vs public interest). Lets call the indicator Private Interest Index (PII) PII = (absolute impact of income changes on CCI) / (absolute impact of Politics & Society Index on CCI).

Consumer dilemma: private or public interest (explanation)

15

doxod/news

2009 2010 2011 2012 2013 2014 2015 2016Source: FPA

During 2009-2013, consumers cared the most about their private interest. 2014 – more worries about the country, starting 2015 –gradual reversal to private

Private Interest Index

16

High unrest / private interests less important

Probably typical when some turbulences in the country occur and people get

involved in public life partially sacrificing private interests (change their attitudes)

High unrest / private interests more important

Probably typical when some turbulences in the country occur, but people are not

willing to change their attitudes

Low unrest / private interests less important

Probably not a frequent situation

Low unrest / private interests more important

Probably typical when people are rich and satisfied OR disappointed and concentrate on personal situation

Understanding consumer reaction to turbulent times (explanation)

Consumer Confidence driven by(Private Interest Index)public interests private interests

Consu

mer U

nrest I

ndex

lowhig

h

17

1Q 2009

2Q 20093Q 2009

4Q 2009

1Q 2010

2Q 20103Q 2010

4Q 2010 1Q 20112Q 20113Q 2011 4Q 2011

1Q 20122Q 20123Q 2012

4Q 2012

1Q 20132Q 20133Q 20134Q 2013

1Q 20142Q 20143Q 2014

4Q 2014

1Q 2015

2Q 20153Q 2015

4Q 2015

1Q 20162Q 2016

0,10

0,20

0,30

0,40

0,50

0,50 1,00 1,50 2,00 2,50 3,00 3,50

Y2009

Y2008Y2010

Y2011-Y2013

Consumer 2009: lots of worries, quickly calm down, no changes in general vision and behavior

Consumer Confidence driven by(Private Interest Index)public interests private interests

Consu

mer U

nrest I

ndex

lowhig

h

Source: FPA

18

1Q 2009

2Q 20093Q 2009

4Q 2009

1Q 2010

2Q 20103Q 2010

4Q 2010 1Q 20112Q 20113Q 2011 4Q 2011

1Q 20122Q 20123Q 2012

4Q 2012

1Q 20132Q 20133Q 20134Q 2013

1Q 20142Q 20143Q 2014

4Q 2014

1Q 2015

2Q 20153Q 2015

4Q 2015

1Q 20162Q 2016

0,10

0,20

0,30

0,40

0,50

0,50 1,00 1,50 2,00 2,50 3,00 3,50

Y2011-Y2013

Y2015

Y2014Y2016

Y2008

Consumer 2013-2016: long journey to public involvement and back? Or consumers will remain different?

Consumer Confidence driven by(Private Interest Index)public interests private interests

Consu

mer U

nrest I

ndex

lowhig

h

Source: FPA

19

Implications for markets and marketing

20

Implications for markets and marketing1. Consumers carefully decide how much and on what to spend their budget. No waste of money. 2. According to macroeconomic forecasts household income will grow slowly meaning that the same

trend will be observed in the majority of markets.3. Impact of inflation on consumers decreased meaning that there are will be no further dramatic

shifts among price segments. Still, the cheapest is not the best.4. Price competition is not a panacea: even if the total consumer demand declines, when choosing

among brands consumers will be looking for the one satisfying their individual (private) needs the most (there is a need to persuade the consumer).

5. Compared to 2015, consumers are becoming more calm, but still very attentive and fast in their reactions to changes or events including those in the markets.

6. Given that consumer demand will gradually improve, it is good time to invest in strategic brand development to gain in the future.

21

Maksym MashliakivskyForesight & Predictive Analytics

+380 67 657 6422+380 44 223 6557

[email protected]

Thank you for your attention!