Comment: Silver linings; How will cash strapped UK consumers be spending their money?
With austerity measures biting and a possible triple dip recession looming, UK consumer goods and retail sectors are not exactly awash with optimism for the coming year. By Jon Copestake, EIU
However, there will be some bright spots and a new report ‘Convergence with Divergence’ from The Economist Intelligence Unit and Mintel has tried to find out what they will be.
It would be impossible to talk about 2012 without discussing the weakening of consumer demand and the impact on the high street. With January already seeing the closure of household names like Jessops, HMV and Blockbuster, accounting for a combined storecount of almost 1,000 outlets and almost 10,000 staff, it is difficult to see how the coming year will offer much by way of opportunity.
To a large degree this is true. When benchmarked against the emerging markets of China, India, South Africa, Mexico and Turkey, as well as the USA, UK growth prospects lagged behind the rest across the full range of consumer goods categories. But there should be little surprise here, these emerging markets were selected especially because of their growth potential, something we cannot boast of here in the UK.
Never Miss a Retail Update!In nominal terms average annual expenditure growth from 2013 to 2016 is expected to be around 3.6%. This is an improvement over the last three years, when it was just 2.4%, but inflation will erode this figure substantially. In fact real expenditure growth is expected to rise by less than 1% per year.
However, what the UK findings did highlight was that some categories will fare better than others over the next three years. It is these areas which could offer respite from the pervasive economic gloom.
One example highlighted in the ‘Convergence with Divergence’ report is that of chocolates, especially individually wrapped brands. These have so far shown resilience to the downturn and reflect a need for consumers to give themselves affordable treats, especially in harder times.
The need for consumers to treat themselves is a recurring theme across retail and consumer good categories. Last week a report by Nielsen highlighted ground coffee as the luxury that UK consumers could not give up, seeing sales rise by over 13% in 2012. This has also been reflected in market polarisation among British consumers to shop at discounters like Aldi and Lidl for essentials, but trade up to more premium retailers like Waitrose for more aspirational purchases.
We expect the practice of topping up income inelastic categories with the occasional luxury to feed through into consumer spending growth over the next three years. As a result, categories which will perform best will be those that enable consumers to treat themselves.
Although the “lipstick index” Leonard Lauder’s hypothesis that lipstick sales have an inverse correlation to economic growth because women tend to buy more lipstick when economising elsewhere has been discredited (largely because lipstick sale also grow when the economy is doing well), the notion of people treating themselves to affordable luxuries to offset economic gloom remains plausible.
As a result beauty products, for example, are expected to outperform overall expenditure growth along with clothing as “recession fatigue” drives consumers to occasional binges on feelgood items. Value added food categories such as packaged food and foodservice are also expected to grow at a faster rate than overall spending as consumers trade up their eating habits to reflect time sensitivity and quality aspirations. The category tipped for fastest growth is non-alcoholic drinks as a raft of innovations such as functional drinks, energy drinks and healthier options target the burgeoning male market.
While beauty product are expected to exceed overall consumption growth, personal care is likely to see a much weaker situation as consumers cut down on non-essential items that also fail to add an element of luxury.
Other categories such as commodity food, alcohol and tobacco will remain largely flat. Although these represent an essential part of some shopping baskets, it seems unlikely that consumers will be trading up on basics. In fact the opposite could be true as shopped seek bargain prices for staples, especially if legislation such as “plain packaging” is implemented to undermine loyalty to certain cigarette brands.
Man cannot live on bread alone and, even as austerity persists, consumers will still want to supplement their staples with the occasional box of chocolates.
