Generation Z spending habits are different than any other generation. What does that mean for business?

Published December 21, 2020

Generation Z grew up with the Great Recession, and they’re entering adulthood on the back of a once-promising economy that has been upended by the pandemic. That deep experience with economic uncertainty will likely reinforce some spending habits that Generation Z inherited from millennials while creating new financial behaviors that businesses must master in the years ahead.

These young consumers demand fast, dependable technology tools and will pay a premium for personalized products and services. But businesses also have to ease Generation Z’s skepticism about data security and lead with a mission that goes beyond simply turning a profit to win their loyalties.

Who is Generation Z?


Generation Z (Gen Z) is generally considered to start somewhere around 1995, with researchers at Morgan Stanley pegging their birth years from 1997–2012. That means the oldest members of the group are just entering early adulthood—and establishing earning and spending patterns that could follow them for decades—while many others are still learning their first lessons about spending, saving and finance from their families.

Morgan Stanley estimates that Gen Z will become America’s largest generation by 2034, growing to just under 80 million. The bank estimates that this “youth boom” could affect economic growth in ways not seen since the heyday of the Baby Boomers.

Although still young, Generation Z already has significant spending power at their fingertips. Consulting firm Barkley Inc. estimates that the young consumers may already represent annual direct spending of more than $140 billion in the U.S. and generate up to $127.5 billion in additional spending by other family members. That’s all before they reach their prime working years, a threshold that Morgan Stanley projects will start in 2022 and last until the late 2030s.

Gen Z will become America’s largest generation by 2034.

Beyond just being digital natives—the iPhone was already five years old when the youngest among them were born—members of Generation Z are power users of social media and peer-to-peer online services. Pew estimates that nearly all American teenagers have access to a smartphone and that 97 percent use one of seven large digital platforms. A Morgan Stanley survey found that 60 percent of Generation Z had actually used a smartphone before the age of 14. Experts say those experiences will have a powerful effect on shaping that generation’s expectations for marketing, shopping and saving.

Generation Z’s spending habits and overall values will also be influenced by their unique home and family lives. Surveys show they are likely to be more ethnically and culturally diverse and better educated than previous generations. But they’re also being shaped by economic uncertainty: this spring, half of the older members of Gen Z told Pew researchers that they or someone in their home had lost income or a job because of the COVID-19 pandemic, notably worse than other generations.

How are Generation Z’s spending habits different from other generations?


While they inherit some characteristics from the millennial generation, Gen Z consumers are already developing the spending and saving habits that should stay with them through adulthood. That includes an expectation that payment technology, a digital-first approach and digital sales channels are fast and reliable.

Morgan Stanley research estimates that, in the decades ahead, millennials and Gen Zers will combine to represent a “tag team” of more than 150 million Americans, and the two groups already show some similarities. Morgan Stanley found that millennials and Generation Z both spend an outsized portion of their income on eating out, mobile devices, transportation and housing.

Generation Z spends an outsized portion of their income on eating out, mobile devices, transportation and housing.

E-commerce has infused Generation Z’s overall expectations for consumer spending, driving strong preferences for value, availability and choice in their shopping experiences, according to research from IBM and the National Retail Federation. But online shopping hasn’t eaten all of retail yet: the NRF/IBM survey also found that 98 percent of Generation Z consumers still shop in physical stores some or most of the time.

Generation Z is fully immersed in the ease of moving money around, with some experts estimating that three-quarters of the group use a money-transfer app such as Venmo or Zelle once a month. Younger consumers are able to access social media apps years before they can open an actual bank account, which means traditional financial institutions could face extra work in communicating their value beyond simply providing payment infrastructure. There’s a lot at stake: Morgan Stanley estimates that Generation Z could represent about a third of U.S. consumer debt in the next 20 years.

Generation Z loves value but will pay for unique experiences


An uncertain economic outlook should only increase Generation Z’s preference for value when they’re shopping. Our friends at the NRF report that 65 percent of Generation Z tend to look for value when making a purchase decision, and more than half will change brands if they find quality lacking. 

The Boston Consulting Group says Generation Z is also more likely than other generations to “trade down,” purchasing a lower-priced and lower-quality item in less-critical categories in order to prioritize spending somewhere else. And once the pandemic began to seriously disrupt the U.S. economy, BCG also found that 66 percent of Generation Z members surveyed were pessimistic about the pandemic’s effect on their financial bottom line—a higher rate than any other generation. 

Generation Z will still spend money on luxury items.

Gen Zers are also happy to look to decentralized networks to make and spend money. A survey from e-commerce company Afterpay found that 72 percent of Generation Z want to start their own businesses, and many use online, peer-to-peer marketplaces to make up to $10,000 per year beyond their regular pay.

Although they like a good bargain, Generation Z will still spend money on luxury items. But they part ways with millennials on this score. Instead of seeking nameplate brands that show off their social status, Generation Z consumers are more likely to pay a premium for items that are unique and tailored to their interests, according to researchers at consulting firm McKinsey.

What do Gen Z’s spending habits mean for businesses?


Because they’ve grown up with personalized, powerful tech, Generation Z expects to have a better idea of what’s going on under the hood of any business angling for their dollars. Tapping into Generation Z’s spending habits and building lasting relationships with these consumers means focusing on the company’s core values, communicating them clearly, and investing in technology that makes the shopping experience seamless and friction-free.

Experts say that Generation Z places a higher premium on the social values of a company trying to sell them something, reflecting a general belief that businesses should use their financial power to improve the world—90 percent of consumers from Generation Z say that companies have “a responsibility to address environmental and social issues,” according to McKinsey research.

While most members of Generation Z use their smartphones to communicate with friends and family, they’re not against bringing businesses into the conversation. According to the NRF, more than a third of Generation Zers would be interested in making digital content on behalf of a brand, while more than 40 percent are willing to participate in games or product review opportunities offered by businesses.

But Generation Z consumers have high expectations for the technology tools at their fingertips. The NRF also reports that about 60 percent of Generation Z consumers are simply unwilling to use apps and websites that load too slowly or make it too hard to find what they’re looking for.

More than a third of Generation Zers would be interested in making digital content on behalf of a brand.

Generation Z consumers are also wary of the ways their data can be used, but they’re willing to make the trade if the benefits are clear. The NRF survey found that fewer than a third of Generation Z consumers are interesting in giving businesses “health and wellness, location, personal life or payment information.” But more than 60 percent drop some of that reluctance if they feel better about data security.

Finally, businesses can’t forget to appeal to the parents and other influential adults in the lives of Generation Zers. After all, many of these consumers haven’t gone off to college or started their working lives yet. Eighty percent of parents with Generation Z kids surveyed by the NRF said they were more likely to shop at retailers that made it easy to involve children in the process. Some examples? Family wish-list functions on e-commerce sites, toy tests and tryouts and in-store experiences that pair merchandise with media from a kid’s favorite entertainment brands.

Invest in Gen Z now to reap the rewards


Generation Z consumers expect the upside of digital retail experiences, even if they’re shopping in-store—tons of options, unique items and great value—without the downsides, like invasive data collection practices or hard-to-manage, under-developed tech. 

The shock of COVID-19 adds another layer to this generation’s commercial calculus, one that experts think could have long-lasting effects. But their commitment to value that goes beyond price points gives companies an opening: communicate core principles through the channels Generation Z already uses, and this surging group of consumers will pay attention.

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