In addition to soaring inflation, strikes, sluggish business and rising interest rates, bad news on our buying habits was almost inevitable. The volume of goods sold in the UK is fall nowaccording to the latest monthly data from the Office for National Statistics (ONS), with food purchases being the main culprit.
Consumer confidence is at an all-time low for the second month in a row, the closely watched newspaper says GfK consumer sentiment survey. People are more downcast now than in the depths of COVID or even during the global financial crisis.
With the British economy already apparently At the onset of a recession, we asked retail expert Professor Leigh Sparks of the University of Stirling for her perspective.
What’s the big picture?
Times are tough as people start to feel the pinch of soaring consumer goods, energy and petrol prices – it was £1.97 a liter in Stirling this morning. If you’ve seen a drop in your benefits, or if you’re paying more for National Insurance, or if your salary isn’t keeping up with inflation, your income has gone down. It was a multiple shock for people – in a very short time.
In food in particular, patterns are starting to change. Were see tighter budgets – for example reports of people handing things over to checkouts when they reach £30 in purchases. There is evidence that people are turning to cheaper brands and shops. Convenience stores fare much better than department stores because consumer research for bargains and value. In addition, ONS retail sales figures are often revised downwards.
UK Retail Volumes (YoY)
Why does food shopping drive the drop rather than optional items?
Because the cost of living hits people very urgently and directly. Food is a much higher percentage retail sales than other categories, and the cost is rising rapidly. Everything related to cereals is affected by Ukraine. The farm-related agriculture index shows ridiculous spikes.
heat waves in places like Spain don’t help. Some UK facilitieswhich grows much of the country’s greenhouse tomatoes, peppers and so on, didn’t start this year because energy prices were rising so rapidly.
Overall non-food sales volumes are unchanged in the ONS data, but vary widely between categories. Clothing has increased, although this may well be seasonal. It’s offset by declines in homewares, furniture, and starter stores — big purchases are postponed.
How does this compare to previous crises?
The 40-year high in inflation and the low in consumer confidence in a survey from about 50 years ago tells you that we are going through very difficult times. It also came in the wake of the pandemic, Brexit and a decade of austerity. As a result, people are much less resilient, so it affects them faster than it could have.
Soaring energy prices are comparable to 1973 and inflation was almost 20% in the early 1980s, but consumer behavior is currently influenced by fears about what’s to come. If the supply of products remains a problem because of the pandemic, war and global warming, then what will it be?
GfK data shows that consumers are already feeling negatively affected, but the biggest negative for them is the macroeconomic situation 12 months from now. They watch the outright acceleration in the cost of living and fear that it will continue.
Is consumer sentiment too negative?
There may be excessive negativity around the macro outlook. At Tiverton and Wakefield By-elections in the UK, many voters told their doorsteps that the government was doing nothing about the cost of living. It’s hard to know if this is overstated by the media because it fits the current narrative, but people certainly have reason to be concerned.
The geopolitical situation could make matters worse, especially when winter arrives and energy demand increases. I would also highlight the massive use of food banks : the number of people struggling at the bottom of the scale has been steadily increasing, so they are starting from a low base.
Which retailers will be winners and losers?
The cost of heating, lighting and electricity for retailers is rising. And unlike households, there is no cap on energy prices to help businesses. So now that consumers are also reducing their spending, all retailers’ calculations of cost versus revenue are changing.
Budget retailers like Aldi, Lidl, Home Bargains and B&M will benefit. Of the other major retailers, the ones that will hold up the best will be those that offer good discounts, such as through loyalty cards or branded/own brand products. In categories such as furniture, home and big buys, there is an opportunity for retailers with good prices – Dunelm, for example.
Where it becomes difficult to comment on individual retailers is because you don’t know their stock status. Many could be hungover from COVID and therefore incur high investment costs. They’ll have tough decisions to unload it, so there could be some real bargains for consumers.
Are we expecting collapses?
In recent years, there’s been a shake-up of companies that built too many stores or had high costs or just weren’t that good. So there may be victims or there may not be.
Most management teams have never had to trade during high inflation. How quickly teams adapt will make the difference between surviving and not surviving. For example, high inflation changes the way you need to manage cash flow. This changes the price at which you buy shares, how long you’re willing to hold them, and how much you’re willing to pay for storage.
Is there a case of optimism?
There are still people who have money and are looking for interesting things to buy. During the pandemic, we’ve also seen strong performances from local freelancers and people thinking local, acting local, and spending local – those are positives.
More generally, if we get energy costs under control, including gasoline, that would be a big change: it would make consumers more positive and reduce inflation, and so part of the story would improve.