Rising inflation has pushed the UK into a cost-of-living crisis, the worst of its kind for generations with the full impact yet to emerge. Many consumers have already begun to change their behaviours and reprioritise their spending. Our research shows almost 9 in 10 UK consumers will be forced to reduce their spending to help cover essentials, whether by trading down, shopping less frequently, or sacrificing certain purchases altogether.
This has significant implications for the UK retail and consumer industry, affecting sectors that were among the hardest hit during the pandemic as many businesses are just ‘getting back to normal’.
Stagflationnation
Many economists expect the economy to slow rapidly in the upcoming quarters, reaching the verge of a technical recession – two consecutive quarters of negative GDP growth.
Our research reveals four consumer cut back archetypes, based on how UK households perceive the cost-of-living crisis and resultant changes in their spending behaviour.
Expected financial impact on the UK retail and consumer industries
With the average household set to cut back £887 of their discretionary spending through to April 2023, UK retail and consumer industries are at risk of losing out on £24.9 billion of spending this financial year (12 months to April 2023).
The scale of the Cut Back Economy varies by different sub-sectors across the retail, leisure, and consumer industries. There are different consumer spending priorities based on the nature of the purchase in terms of value and frequency (eg, staple v discretionary):
Grocery
The average household is looking to cut back £494, or £41 per month, on their food shop over the twelve months to April 2023. This has the potential of removing £13.9 billion of business across the sector in this period.
Fashion
The average household is expected to cut back 10.6% of their spending on fashion, wiping out a potential £3.7 billion of business across the sector for this period. Consumers cutting back on fashion intend to do so by shopping for new clothes less often (47%) and conduct more research and price comparison (45%) before committing to a purchase.
Household goods
The average household is expected to cut back 5.4% of their spending on household goods, removing a potential £2.1 billion of business across the sector for this period.
Beauty
The average household is expected to cut back 4.3% of their annual spend on beauty products, resulting in a potential £0.9 billion reduction of business across the sector for this period.
Electricals
A quarter of households plan to cut back on electrical items, resulting in a potential £0.5 billion reduction of business across the sector for this period.
Household polarisation
Our research shows that the least affluent* are already experiencing inflation of almost 12%, compared to around 9% for the wealthiest households. This reflects the disproportionate impact of rising prices across essentials such as food and energy, which are seeing some of the fastest price rises.
The Retail Economics Cost of Living Tracker shows the average household saw their spare cash plummet 10.6% in May 2022 compared to last year, leaving them with £127 less to spend on non-essential purchases during the month.
Consumer cut-back spending behaviours
Substitution
Substitution is the most common cutback strategy adopted by consumers, with around one in two consumers actively switching to cheaper brands, retailers, or service operators to combat cost pressures.
Scale back
43% of consumers plan to shop less frequently in response to the cost-of-living crisis, resulting in reduced footfall. Retailers and leisure operators will need to provide stronger incentives for consumers to visit their stores or pay for their services.
Shop around
Two in five shoppers (39%) intend to do more research, compare prices and shop around for deals before committing to a purchase. More than a third (36%) of consumers plan to use loyalty schemes and vouchers more often, while a similar proportion (31%) will look to buy in bulk for a better deal, where possible. However, less than 10% of consumers plan to use credit or buy now pay later schemes more often, suggesting a reluctance among households to take on more debt.
Consumer strategies: opportunities and risks
Companies will need to adapt to differentiate themselves from the competition and maintain relevancy as a more cost-conscious consumer emerges.
Investment in data science and digital transformation is essential to ensuring that any decision-making is strongly data-driven.
Alongside a cost-of-living crisis, manufacturing delays, shipping backlogs and labour shortages are adding additional layers of cost and supply chain complexity for consumer-facing businesses. Two areas to consider are:
Diversification
Using shorter, more flexible supply chains will help reduce reliance on single countries or manufacturers. However, moves towards on-shoring or near-shoring can impact margins due to local cost differences.
Inventory management
Establishing alternative supply sources to enable fast-tracked volume delivery capability.
Finally, hospitality and leisure businesses must not lose sight of longer-term environmental, social and governance (ESG) goals, despite the current cost and margin pressures.
What’s next?
The most recent reports anticipate inflation peaking at 18.6%, yet one in eight respondents to our latest Business Tracker Survey said they didn’t have sufficient working capital to deal with an inflation peak of 11%. Business leaders are experiencing difficult times, with costs accelerating at a pace.
However, by implementing sophisticated strategies and agile operating models that demonstrate a deep understanding of the Cut Back Economy and how consumer behaviour will likely play out, retailers and consumer-facing businesses can position themselves to manage the challenges ahead.
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For more insight and guidance, get in touch with Kevin Coates.
