Sri Lankans turn to discretionary spending as consumer behaviour shifts after years

Sri Lankan consumers are gradually shifting spending beyond essentials, supported by easing inflation and modest income gains, in a sign of recovering confidence following years of economic turmoil.

The interest rates which are also at far lower levels and further coming down are also helping people to spend a lot more on what they had to forgo during years of runaway inflation and prolonged product shortages as borrowing costs have fallen in tandem.

John Keells Holdings’ (JKH) consumer foods business which provides a close proxy for the discretionary food spending offered evidence of this shifting in consumer behaviour and spending in the recent past.

For instance, JKH’s consumer foods business which has Elephant House branded beverages, frozen confectionery, dairy and the likes reported a robust 34 percent growth in recurring earnings before interest, tax, depreciation and amortization (EBITDA) – an accounting measure close to cash operational performance of the business – to Rs.6.68 billion for the financial year ended in March 31, 2025.

As a result, consumer foods became the segment which reported the highest growth in the measure after property which turned to a profit at EBITDA level from a loss in the previous financial year.

The company has seen double digit growth in volumes during the year led by its beverages and confectionery businesses, reflecting that the consumer was now spending an increasing share of their income on these discretionary food products which they couldn’t fully afford until about the second half of last year.

“Sustaining the encouraging growth momentum witnessed in the previous quarters, the beverages (carbonated soft drinks segment) and confectionery businesses recorded volume growth of 16 percent and 22 percent, respectively”, JKH Chairman, Krishan Balendra told in his annual letter to the shareholders this week.

“The strong growth in volumes was due to an increase in consumer activity, improved seasonal sales and favourable weather conditions. Volumes in the confectionery business were driven by higher sales in the bulk segment followed by the impulse segment which comprises higher margin products,” he added. Meanwhile, the convenience foods business has also recorded an increase in profitability driven by an improvement in volumes, he said. “The increase in demand is due to a rise in consumer activity on the back of a stable economy, which also resulted in consumers shifting their spend towards more discretionary items. The strategic price revisions undertaken in the previous year, which improved product affordability, also contributed towards volume growth” he added.

Besides the rising demand, the JKH’s beverages and confectionery businesses also saw their margins improving on a sustained basis helped by lower raw material prices, electricity costs and the increased operating leverage due to higher volumes enabling absorption of fixed costs.

The broader consumer prices in the economy measured by the consumer price indices started falling from September last year and the trend has continued through April and is expected to extend to a couple of more months.

The economy grew by 5.0 percent in 2024, providing more income to the consumer to spend on things which they had to forgo from around the latter part of 2021 through the first half of last year.

As the economy has turned around and is growing, supported by the relative strength in the external sector and the lower interest rates, the consumers shift to more discretionary spending and durable goods will also be seen in the coming periods supporting entities which offer products in these categories.