Consumer spending shoots up on higher prices amid declining sales in retail sector

In the three months to March 2024, the consumer spending index fell by five per cent to 110 from 116 in the final quarter of the previous year, new data shows. 

This is according to the ICEA Lion Asset Management’s (ILAM) first quarter 2024 Consumer Spending Index, which also showed that individual spending increased during that period. 

This Index was derived from interviews conducted with 1,043 consumers and 191 retail businesses collected data in Nairobi, Mombasa, Nakuru, Nyeri, and Kisumu.

Some 26 per cent of the respondents reported an average monthly income ranging between Sh50,000 and Sh100,000. 

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According to ILAM Chief Executive Einstein Kihanda, the five regions were selected because most consumers’ spending takes place there, being the biggest urban centres in the country. 

“The study shows that Nairobi fared better than other counties, with most businesses experiencing an increase in sales,” said Mr Kihanda. 

According to the study, individual spending rose but retail business sales lagged.

Increased spending, which rose by 75 per cent among respondents, was attributed to rising prices of goods. 

According to Mr Kihanda, the mismatch between consumer spending and retail sales shows that there has been an element of down trading where people traded more and spent more in less formal businesses.

He pointed out that their study mainly focused on fairly formal businesses.

“It could be that the allocation of spend is moving away from discretionary spending and more towards essential spending,” said Mr Kihanda. 

Another 25 per cent of respondents indicated that they spent more due to purchasing additional goods.  

Among those reporting decreased spending, 57 per cent cited lower prices of goods as the reason, while 43 per cent attributed it to purchasing fewer quantities of goods. 

The study shows that consumer spending in Nairobi fell in the final quarter of 2023. 

Individual spending trends rose by 36 per cent between October and December 2023 compared to six per cent between January and March 2024. 

From the study, individual spending trends saw a significant improvement in the final quarter of 2023. 

This was driven mainly by women and consumers aged between 18 and 35 years.

The rise in spending was largely attributed to the higher cost of items purchased. 

The study shows that 88 per cent of respondents made purchases using personal income, while 12 per cent relied on credit. 

Among those who used credit options, mobile loans and local shop arrangements emerged as the most preferred mode, accounting for 35 per cent and 22 per cent respectively. 

The lower-income segment recorded the strongest improvement in spending trends. 

Mr Kihanda noted that consumer spending power remains relatively resilient. 

In the study period, retail business sales trends declined by 15 per cent compared to the final quarter of 2023 when the sales trends improved by six per cent. 

The rise between October and December was driven by higher customer traffic and higher individual customer spending, while the decline from January to March was especially in the clothing retail and food and beverage categories. 

Mr Kihanda said individual spending trends exhibited positive trends, while retail business sales came under pressure in the first quarter of 2024. 

In the review period, 48 per cent of respondents reported consistent income, while 25 per cent experienced an increase and 27 per cent observed a decrease.

The study shows that more than half of the respondents prioritised food and shelter expenses, while the majority allocated less than 10 per cent of their income to leisure and entertainment.

In the study, 46 per cent of respondents allocated less than 10 per cent of their income towards savings and about nine per cent reported no allocation for savings.

According to the asset manager, individual consumers cut out non-essential expenses when faced with rising prices of goods, while others opted to decrease the quantity of essential purchases.

Additionally, 18 per cent of respondents utilised their savings to manage the price increases, while 15 per cent sought supplementary income through additional employment. Borrowing and utilising available credit options comprised 11 per cent of respondents’ strategies for coping with price increases.

“Twenty-two per cent of the respondents foresee a reduction in spending on essential items, while 78 per cent project an increase in expenditure on essentials for Quarter 2 of 2024. Nineteen per cent anticipate heightened spending on non-essential items, while 81 per cent expect a decrease in expenditure on non-essentials during the same period,” says the study.

Small businesses were the largest respondents, with retail stores and restaurants emerging as the interviewees’ predominant sectors.

In the last quarter of 2023, Approximately 56 per cent of the businesses experienced a decline in sales, with the majority reporting a decrease ranging from one per cent to 20 per cent. On the other hand, 44 per cent of businesses saw an increase in sales.

In the same period, 51 per cent of businesses in Nairobi Reported a decrease in sales, while 49 per cent experienced an increase. Outside Nairobi, 62 per cent of businesses observed a decline, with 38 per cent reporting an increase.

Sixty-one per cent of businesses in the clothing/apparel segment reported a decrease in sales, while 57 per cent of those in the house fittings and accessories category experienced a decline.

Fifty-six per cent of restaurants/bars and leisure outlets observed a decrease, according to the study, while 54 per cent of retail stores reported a decline in sales.

In the first quarter of 2024, 62 per cent of businesses experienced a decline in sales, while 38 per cent reported an increase.

Specifically, within Nairobi, the majority of businesses noted a decrease, with the remaining 38 per cent indicating an uptick in sales.

The study showed that the majority of businesses expressed positivity in response to changes in sales.

In the review period, products such as cooking oil, maize flour, sugar, and fuel are among the primary products that are said to have contributed to fluctuations in sales, either witnessing increases or decreases.

Businesses interviewed address rising supply costs by passing them on to customers through price hikes.

Some chose to maintain sales at the same price by reducing profit margins. Additionally, they utilised credit options and drew from company reserves to cope with the increase in the cost of stocks.

More than half (52 per cent) of businesses interviewed anticipate a sales increase in the upcoming quarter, with 11 per cent expecting a decrease. Meanwhile, 20 per cent are uncertain about future sales, with the remaining 17 per cent confident sales will remain steady.

Mr Kihanda said the effect of the appreciating shilling is likely to be felt in the second quarter of of this year.