Savvier and more confident consumers: what does it mean for UK retail?
With consumer sentiment at record levels and more money in people’s pockets, it should have been a bumper 2015 for retailers. Instead, retail performance was lacklustre – according to the British Retail Consortium, like-for-like sales on the high street were flat in the last quarter of the year. So, why has retail disappointed, and what is the outlook for 2016?
Let the good times roll?
Low oil prices may be unnerving for the financial markets, but 99p per litre petrol means that consumers have never had it so good. Combined with continued low interest rates, wage inflation and flat prices, disposable income is at an all-time high – around £57 per week more for the average family, according to ASDA’s disposable income tracker.
This extra cash is reflected in PwC’s own consumer sentiment survey. Every 3-4 months, we ask around 2,000 consumers whether they think they will have more or less money in their pockets over the coming year, after paying bills and essentials. Consistently through 2015, and for the first time since we began our survey in 2008, more people thought they’d be better off than worse off in 12 months’ time. This positive sentiment was reflected across every part of the UK and across all socio-economic groups.
And, in a reversal of fortunes, older people have seen the biggest increases in confidence, boosted by pension reform and falling prices, with the gap between the typically more optimistic young and the typically more pessimistic old narrowing. Perhaps under 25s missing out on the National Living Wage and the challenge of getting on the housing ladder are taking its toll on 'Generation Rent'.
The high street is missing out
There may be more money to spend, but consumers aren’t spending it on the high street. Footfall has been in decline for the last two years, and fell by 4% in December alone. With fewer reported delivery issues with internet shopping this year and more Black Friday promotions online to avoid chaotic scenes in stores, there wasn’t even a last minute high street rush by less organised present buyers. With rents and rates rises expected to accelerate in the coming year, there’s even more urgency for retailers to re-evaluate their store portfolios in an increasingly e-commerce driven retail world.
The one bright spot was out-of-town retail parks, which saw footfall rise by 2% in December. This was driven by strong performance of the furniture and DIY sectors, with confident consumers at last willing to invest in big ticket purchases they have been putting off for the last few years; and also by the strong performance of leisure venues, such as restaurants and cinemas.
So which other retailers won last Christmas?
Apart from the success of the home category, there were few sector trends over the Christmas period. Even in a normally predictable category like grocery, mainstream retailers like Tesco and Morrisons outperformed on a like-for-like sales basis helped by store closures and a renewed focus on price; while previously reliable outperformers in the premium and discounter segments did less well.
In fact, value retailers across many categories saw negative like-for-like sales, including Poundland, B&M and Primark, as they were distracted by rapid UK store roll out or international expansion.
Fashion was arguably the worst-performing category, with several high street stalwarts announcing pre-Christmas profit warnings as a result of the unseasonably warm weather in October and November. December itself saw better sales for many players, although at the expense of margin as retailers discounted to clear stock. Online pure play retailers, such as Asos and Boohoo, and brands with authentic handwriting, such as Jigsaw, Joules and Mint Velvet, fared best overall.
What does this mean for retailers in 2016?
While consumers have more to spend, PwC’s economists overall consumer spending will only grow by 2.5% p.a. between now and 2020. With consumers needing or wanting to spend more on, for example, housing, healthcare, leisure and home products, then spending on core retail categories like grocery and clothing will be at best flat in real terms (see our Economics insight here).
Winning in an environment where consumers would rather spend on experiences will be tough for retailers. Unless they are the cheapest on display in low consideration categories, products will need to be more relevant, more tailored and give more reasons for consumers to part with their hard earned cash. And, as the struggle for top line growth continues, the cost of doing business is ever increasing.
What’s your view on today’s consumer and the importance of “stuff”? How do you think winning retailers will respond to the challenge of responding to a more confident and savvy consumer? Share your comments below or contact us to tell us what you think.
Contact
Lisa Hooker: lisa.j.hooker@uk.pwc.com
Kien Tan: kien.tan@uk.pwc.com
Sam Farnfield: sam.p.farnfield@uk.pwc.com
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