Coping with Low Consumer Confidence: Strategies for Retail Resilience in 2023
Gfk Consumer Confidence
The Gfk Consumer Confidence Score measures how optimistic or pessimistic consumers are regarding their expected financial situation. It is a monthly survey asking consumers to rate the relative level of past and future economic conditions (including personal finance, climate for major purchases, savings level and overall economic situation). This produces an overall score with 0 indicating a neutral feeling and positive / negative scores meaning consumers are optimistic / pessimistic. The record high since the index began in 1974 is +10 points in June 1987; the record low was achieved in September 2022 at nearly -50. It is currently at -25; confidence is very low but it is significantly better than at the start of this year.
Other Economic Indicators
• Core inflation falling (6.7% in Sep) but still high: • Interest rates held at 5.25%, ending a run of 14 consecutive increases • Rising average weekly earnings • Weak growth: 0.8% forecast in 2024, the weakest in the G7
Consumer Behaviour in 2023
Two consumer behaviours tend to be prevalent in times such as these: trading down and the delaying of major purchases.
One of the easiest ways for consumers to trade down is to replace brands with own label equivalents. In the current climate, the mainstream media has been full of direct product comparisons – even Panorama has been jumping on the bandwagon, with a recent report suggesting a £4,000 saving on an annual £10,000 food bill. The latest data from market researchers NIQ show that sales of private label products have been growing twice as quickly as branded (14.1% vs 7.1%).
Trading down generally occurs in products whose purchase consumers cannot delay, such as food or other household essentials. However, purchases of durable, more expensive goods, such as sofas or cars, can be delayed for months or even years. Since their purchase is not urgent, consumers tend to delay the purchase of these goods when confidence is low. According to a recent Yougov poll, half of all consumers have put off big purchases and only 21% said they have not. This has only been exaggerated in this period of low confidence, with even relatively cheap purchases being delayed; the CEO of the British Retail Consortium, Helen Dickinson, said “Clothing and footwear saw weaker growth as families held back spending on children’s uniforms and other back-to-school goods until the last minute.”
How Are Retailers Responding?
Retailers have been quickly adapting to these new consumer behaviours. While confidence is still extremely low, retailers have struggled to rebuild their margins, fearing a loss of market share and public goodwill. However, they have been taking a couple of positive steps:
Loyalty Schemes: Tesco has the king of loyalty schemes, but Sainsbury’s is the pretender to the throne. Clubcard- and Nectar-only prices have quickly cemented themselves into the consumer psyche. With advancements in data science (AI/Machine Learning etc), customer data is more valuable than ever. Sainsbury’s has said that the Nectar360 loyalty and marketing business could add an additional £90m in profit over five years. Tesco’s boss Ken Murphy commented that retail media could be a “meaningful contributor to profit” within three years, which Clive Black at Shore Capital interprets as perhaps £200-300m in the 2027 financial year. Investment:
With rapid progress in automation, there is huge potential for enhancement of the customer experience and for efficiency savings. Amazon Fresh was the first to roll out ‘Just Walk Out’ technology, in which customers are automatically charged for goods put in their basket. Other supermarkets have rushed to get in on the act, including Sainsbury’s SmartShop, which uses Amazon’s technology. Checkout-free stores and automation of processes such as stock-takes is starting to drive down costs and enable retailers to keep competitive prices in the longer term. Whilst investment in new technologies may seem counter-intuitive in uncertain times, the flipside is that retailers who fail to invest risk losing market share and seeing higher costs in the long term.
Conclusion:
In a challenging economic landscape, retailers have been trying to remain flexible and responsive to the ever-changing dynamics of consumer behaviour. Necessity is the mother of invention and tough times have forced retailers to be both more tactical, for example on pricing, but also more innovative, in areas like technology. Both approaches are helping them not only weather the current storm but also position themselves for long-term growth.
