20100425
SABC

Businesses must attempt to predict changes in consumer demand, especially in recessionary conditions, a report by the Bureau of Market Research (BMR) of Unisa shows. The report, compiled by Professors Carel van Aardt and Andre T Ligthelm, released on Sunday, said predictions of consumer demand had become paramount in ensuring business profitability and even sustainability.

In the report calculations were made on the impact of changes in consumer income on the demand for various consumer products. These calculations, termed "the income elasticity of demand", measured the relationship between a change in the quantity demanded of a particular product or service and a change in real income.

The calculations were made for a wide variety of consumer products, which were classified into categories:

- Inferior products showing a decline in demand when consumer income rises (taxi travel and cigarettes);

- Necessity products reflecting demand increases at a lower rate than the percentage increase in income (vegetables and milk); and - Luxury or superior products reflecting demand increases at a higher rate than the percentage increase in consumer income (fine wines and international air travel).

The income elasticity of demand calculations of goods and services in South Africa provided a sound basis for predicting and forecasting future demand patterns, the BMR said. Van Aardt and Ligthelm examined grain products and found that they were necessities with a low positive income elasticity of demand.

This included oats, Taystee Wheat, Mabella, corn flakes, spaghetti, macaroni and other pasta. "No grain products were identified as luxuries reflecting a high positive income elasticity of demand," they said. "Grain products showing a negative income elasticity of demand included mealie meal and maize flour, cake flour, bread flour and sorghum meal and powder."

According to Van Aardt and Ligthelm, the income elasticity of demand with respect to vegetables showed that they were necessities, namely those with a low income elasticity of demand, including potatoes, mealies, onions, tomatoes, dried peas, beans and lentils.

Vegetables considered luxuries included those with a high income elasticity, including frozen cauliflower, frozen pumpkin, frozen potatoes and prepared salads. Vegetables showing negative income elasticity of demand for higher income groups, included cabbage, morogo and spinach. "Generally, the income elasticity of demand for food products shows that the proportion of income spent on food diminishes as incomes increase," the report found. "However, it should be noted that the proportional decline among all foods is not equal," it added.

In other words, the decline was more rapid among staple foods (such as mealie meal) and less pronounced among refined foods. "Generally, it should also be noted that income elasticities for a particular product often show an erratic pattern by household income category." Van Aardt and Ligthelm also calculated income elasticities by household income group.

They said low income households showed a strong consumption focus on basic necessities such as food, beverages and socialising. Products regularly bought by low-income households that showed high income elasticities include white bread, processed meat, baby food, new bicycles, bus transport and dining room and kitchen furniture. Van Aardt and Ligthelm added that middle income households started to show strong preferences for processed and ready-made foods, sports and entertainment and investment in education and medical aid.

Affluent households attached a high value to quality merchandise and spent more on books, photography, gardening and private schools. "They also spend large amounts on SUV vehicles, housing and luxury goods," the authors of the report said.-Sapa