Why is spend­ing in­equal­ity on the rise?

In the US, spend­ing in­equal­ity – the dif­fer­ence in how much house­holds spend at gro­cery stores – is on the in­crease. Is tech­nol­ogy to blame?

Finweek English Edition - - OPINION - Editorial@fin­week.co.za Jo­han Fourie is as­so­ciate pro­fes­sor in eco­nom­ics at Stel­len­bosch Univer­sity.

oneof the things I re­alised soon af­ter mar­riage, is that my wife and I have dif­fer­ent strate­gies when it comes to gro­cery shop­ping. I like to stock up, buy­ing bulk on the cheap, while she prefers to visit the store more fre­quently, ac­quir­ing only what is nec­es­sary for the next few days. This of course means that we never run out of canned beans, but of­ten out of milk.

Such choices are at the heart of eco­nom­ics. Un­der­stand­ing how, why and when a buyer chooses a prod­uct or ser­vice is of­ten the dif­fer­ence be­tween a thriv­ing and fail­ing busi­ness. That is why ev­ery suc­cess­ful firm, from banks to health in­sur­ance to mo­bile com­mu­ni­ca­tions com­pa­nies, spend con­sid­er­able re­sources these days analysing big data to un­der­stand and “nudge” cus­tomers into be­hav­ing in a spe­cific way.

Even gen­eral re­tail, a sec­tor of­ten car­i­ca­tured as un­af­fected by tech­no­log­i­cal change, now has to ad­just to new tech­no­log­i­cal pos­si­bil­i­ties, like sens­ing tech­nolo­gies that track the move­ment of cus­tomers as they browse a store. Tech­nol­ogy can help re­tail­ers to op­ti­mise store lay­out. It can also, with a lit­tle leap of the imag­i­na­tion, al­low for ad­ver­tis­ing that rec­om­mend new prod­ucts when a new cus­tomer walks past based on the con­tent of their pre­vi­ous pur­chases, of their ex­ist­ing bas­ket or of the pur­chases of their friends that is con­nected to them on so­cial me­dia.

Imag­ine buy­ing sham­poo, and re­ceiv­ing a prompt: “Your friend, Her­man, pur­chased [X sham­poo brand] in this store five days ago.” Then there is a plethora of other tech­nolo­gies that are likely to rev­o­lu­tionise the shop­per’s ex­pe­ri­ence, from mo­bile pay­ments (in South Africa: wiCode or Snap­Scan), to dig­i­tal re­ceipts (another South African start-up: Pock­et­slip), to on­line shop­ping.

There is no doubt that these new tech­nolo­gies will shape the way we make de­ci­sions about what, how and where to buy our gro­ceries.

But tech­nol­ogy is not the only thing that af­fects our spend­ing be­hav­iour. A new NBER Work­ing Pa­per by three au­thors af­fil­i­ated to US uni­ver­si­ties, iden­ti­fies an in­ter­est­ing trend in the US over the past four decades: the rise of spend­ing in­equal­ity, or a widen­ing gap be­tween how much dif­fer­ent house­holds spend when they go shop­ping.

We usu­ally mea­sure in­equal­ity by com­par­ing peo­ples’ in­comes. But pre­sum­ably we are also in­ter­ested in how peo­ple spend their in­comes: are there huge dif­fer­ences be­tween how much some house­holds spend vis-à-vis oth­ers, and do these dif­fer­ences in­crease over time? And it seems like this is in­deed the case: the dif­fer­ence in house­hold spend­ing pat­terns in the US seem to be on the in­crease. Some fam­i­lies seem to be spend­ing a lot more than oth­ers.

One sug­ges­tion for the rise in in­come in­equal­ity is the im­pact of tech­nol­ogy. But this is where the au­thors find an in­ter­est­ing re­sult: the rea­son for the rise in spend­ing in­equal­ity, they ar­gue, is not be­cause of grow­ing dif­fer­ences in con­sump­tion caused by greater lev­els of in­come in­equal­ity, but in­stead be­cause Amer­i­cans go shop­ping less fre­quently. They ex­plain it as fol­lows: if a house­hold starts buy­ing gro­ceries once a month in­stead of once a week, their con­sump­tion may not change (they stock­pile to smooth con­sump­tion), but the mea­sured spend­ing in­equal­ity will change be­cause some house­holds in sur­veys will ap­pear as if they spend a lot, while oth­ers will ap­pear as if they spend noth­ing. This dif­fer­ence was less dra­matic when house­holds went shop­ping ev­ery week, and so it ap­pears as if in­equal­ity is on the rise.

Us­ing var­i­ous datasets, the au­thors find two dis­tinct trends to sup­port this the­ory: first, the num­ber of shop­ping trips that Amer­i­cans make has been steadily falling since 1980. In con­trast, the av­er­age ex­pen­di­ture per trip has been steadily ris­ing. Amer­i­cans are mak­ing fewer, but larger, shop­ping trips on av­er­age. Sec­ond, the quan­tity of goods Amer­i­cans buy have been ris­ing, while the amount of time spent shop­ping has de­clined. All of this, the au­thors con­clude, points to higher lev­els of stock­pil­ing by Amer­i­cans.

What ex­plains this chang­ing be­hav­iour? Sur­pris­ingly, it is not tech­nol­ogy in­no­va­tion, which is of­ten con­sid­ered the source of dis­rup­tion. In­stead, the au­thors show, the in­creas­ing stock­pil­ing is a re­sult of the emer­gence of ware­house stores, like Costco, that sell larger quan­ti­ties of goods at lower unit prices.

Tech­no­log­i­cal im­prove­ments like mo­bile pay­ments, dig­i­tal re­ceipts and on­line shop­ping are aimed at re­duc­ing trans­ac­tion costs, mak­ing it eas­ier and cheaper for con­sumers to do their gro­cery shop­ping. Such lower costs should re­sult in a higher fre­quency of shop­ping. Yet, the trends, at least for the US, point in ex­actly the op­po­site di­rec­tion: fewer vis­its to the su­per­mar­ket, with con­sumers pre­fer­ring to buy in bulk and on the cheap.

Per­haps South African con­sumers be­have dif­fer­ently. Per­haps the dig­i­tal rev­o­lu­tion will re­verse these trends quickly; once your fridge can or­der canned beans au­to­mat­i­cally from the lo­cal su­per­mar­ket when sup­plies run low, we won’t need to buy in bulk. But any re­tailer worth their salt would do well to be aware that the prom­ise of tech­nol­ogy can of­ten over­shadow deeper forces pulling in the other di­rec­tion. Tech­nol­ogy re­duces trans­ac­tion costs, but the ben­e­fits of buy­ing bulk seem to out­weigh the costs. Now to con­vince my wife.

The dif­fer­ence in house­hold spend­ing pat­terns in the US seem to be on the in­crease. Some fam­i­lies seem to be spend­ing a lot more than oth­ers.

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