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The Cut Back Economy & Cost of Living Crisis

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Report highlights

10 minute read

This report produced by Retail Economics in partnership with Grant Thornton looks at the impact of the cost of living crisis on UK retail, leisure and consumer sectors. It identifies the opportunities and risks for brands looking to navigate the Cut Back Economy in order to leverage a competitive advantage in 2022 and beyond.

 

 

 

The report is divided into 5 main sections:

Introduction

Part1: The big squeeze

Part 2: Cut Back Economy landscape

Part 3: Opportunities & risks

Conclusion

 

impact of cost of living crisis on uk retail and consumers

 

Introduction

Most consumers are about to experience the tightest squeeze on their disposable incomes within their lifetimes. The everyday cost to power their homes, fill up their cars and pay for weekly food shopping is soaring. Already at the highest level in four decades, inflation is now forecast to hit 11% this year, with the unfolding cost-of-living crisis causing consumer confidence to drop to record lows.

Faced with a tri-pronged attack of rising interest rates, increasing taxes, and rapid inflation, household finances are being tested from all angles, affecting consumers’ ability to completely fulfil their wants and needs.

This signals the arrival of a ‘Cut Back Economy’. 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 huge ramifications 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’. Against this backdrop, there are growing concerns that a combination of tighter monetary policy to combat inflation and ongoing fallout from geopolitical tensions could tip the UK into recession. Whether or not the UK’s service-driven economy avoids recession will ultimately depend on the extent to which consumers retrench, making it crucial for businesses to understand the evolution of the Cut Back Economy and resulting changes in consumer behaviour.

This report has three principle parts:

1. The big squeeze: Overview of the macro forces underpinning the cost of living crisis

2. Cut Back Economy landscape: Quantifies the impact of the crisis and changing consumer behaviour

3. Opportunities and risks: Identifies five key themes for retailers and brands to pay attention to in order to tackle the Cut Back Economy

 

 

Cut back economy retail economics

Part 1 - The big squeeze

The UK economy faces severe headwinds as soaring inflation, slower growth and tightening monetary policy are set against a backdrop of heightened geopolitical tension. For many households, emerging from a global pandemic has only provided temporary relief, only to be replaced by a new reality characterised by economic volatility. As society witnesses the sharpest squeeze on disposable incomes in generations..

 

Stagflation nation

Prices are surging while growth is stalling: the classic hallmarks of stagflation. The distortion of global supply chains since the pandemic, the softening impact of Brexit on UK trade flows, and higher commodity prices are among the culprits.

Inflation was initially expected to be a transitory ‘reopening effect’ post-pandemic. However, prices have risen at a faster and more persistent pace than anticipated, as the economic aftershocks of the war in Ukraine and lockdowns in China exacerbate existing pressures, hitting consumer confidence.

Already at a 40-year high, inflation is now expected to hit 11% before the end of 2022 as a further rise in the energy price cap comes into effect from October 2022 (fig 1). Notably, most consumers would not have experienced this level of inflation during their lifetime.

The Bank of England raised interest rates for the fifth consecutive time in June 2022, reaching the highest level since the global financial crisis, as the bank walks a tightrope between bringing inflation back under control and sustaining economic growth.

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. Reflecting the weaker outlook, the OECD cut its UK growth forecast for 2023 to zero - the lowest in the G20 (except Russia). The combination of a tight labour market, excess savings and government support should help avoid a sharp economic contraction, but considerable uncertainty persists.

Irrespective of whether the technical definition of a recession is met, households will undoubtedly face challenging conditions as the cost of energy, food and imported goods rise significantly.

 

Figure 1. Inflation climbs to 40-year high driven by surging fuel, food and energy prices

Inflation climbs to 40-year high driven by surging fuel, food and energy prices - retail economics

 

Household polarisation

The impact of the cost-of-living crisis clearly varies by household. Those on lower incomes or burdened with debt are inherently more vulnerable to inflationary shocks. They are also less likely to have accumulated a protective savings buffer compared to more affluent households.

Our research shows that the least affluent* are already experiencing inflation of almost 12%, compared to around 9% for the wealthiest households (fig 2). 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 least affluent spend close to two thirds of their household budget on staples such as food and energy, compared to less than half among the most affluent (fig 3).

 

Figure 2. Low-income households experiencing higher inflation

​​Low-income households experiencing higher inflation - retail economics

Fig 3. Low-income households experiencing higher inflation

Fig 3. Low-income households experiencing higher inflation

 

Staples (food and drink, utilities, communication, housing costs), Delayable (clothing and footwear, household goods, luxury purchases), Work-related (Public transport and fuel), Social (air travel, restaurants and hotels).

 

Rising inflation hits

With inflation set to rise further in the months ahead, most UK households face double-digit declines in discretionary income (spare money left over after paying for essentials including food and drink, utilities, communication, housing costs). Although earnings continue to rise, take-home pay is failing to offset price increases across everyday living costs.

For instance, 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.

Stronger earnings growth among the most affluent households has helped offset some of the inflationary pressures and supported discretionary income levels. But even the most affluent have come under increasing pressure as national insurance contributions (NICs) step up, with their spare cash available for non-essential purchases falling by 3.2% in May 2022, or £145 per month.

Even a small drop in discretionary income among the most affluent is significant as this consumer demographic is key to the UK economy. While it represents one fifth of consumers, it is responsible for over 40% of total household spending.

Even a small drop in discretionary income among the most affluent is significant as this consumer demographic is key to the UK economy. While it represents one fifth of consumers, it is responsible for over 40% of total household spending.

Seeing their budgets squeezed, many consumers will adopt recessionary behaviours. They will be forced to either save less, trade down, or cut back spending. Concerningly for the retail and leisure industries (and the wider economy), 41% of consumers expect the current squeeze on living standards to impact their spending habits until at least the end of 2023.

 

Fig 4. Change in Discretionary income by household – May 2022

Fig 4. Change in Discretionary income by household – May 2022 - retail economics

 

Cut Back cohorts

Our research reveals four consumer cut back archetypes (fig 5), based on how UK households perceive the cost-of-living crisis and resultant changes in their spending behaviour.

 

Fig 5. Change in Discretionary income by household – May 2022

Fig 5. Change in Discretionary income by household – May 2022 - retail economics

 

Financially Distressed: 36%

Typically under the age of 45, this cohort are financially insecure and intend to cut back across most (if not all) of their non-essential spending. This is a decision based on necessity rather than choice, as low incomes and/or high debt levels leave little room for manoeuvre to manage rising living costs. Already resorting to extreme measures to be able to afford to pay a bill and cover everyday needs, ‘Financially Distressed’ consumers are twice as likely to have used a food  bank, taken on additional work, or cut back on meals in the last six months.

 

Squeezed Spenders: 25%

These consumers are also financially squeezed, yet are largely unconcerned by the rising cost of living. This cohort tend to live in the moment, likely to dip into savings, increase their borrowing, or use buy-now-pay-later schemes to make non-essential purchases as they tend to not let money worries impact their spending habits. Ultimately, as cost of living pressures intensify, ‘Squeezed Spenders’ recognise that making cutbacks and putting on hold major purchases will be necessary, but their carefree attitude makes them reluctant to do so. Typically urban and middle-income, these consumers are a mix of ages.

 

Comfortable Cautious: 25%

‘Comfortable Cautious’ consumers are financially secure, but the rising cost of living is still a concern on an emotional level. Typically comprising middle-to-higher income households, often with children, this cohort are risk-averse and prefer to adopt a considered approach to spending rather than act impulsively. They will consciously look for deals and switch to cheaper brands in order to cut back across some of their spending, but equally they possess the financial means to go ahead with big ticket purchases. For example, most Comfortable Cautious consumers intend to go ahead with their holiday plans in 2022, unlike the Financially Distressed and Squeezed Spender cohorts that are less financially stable.

 

Financially Immune: 14%

For this affluent group of consumers, the cost of living crisis has had no financial or psychological impact on their behaviour, and they have no plans to cut back their spending. Most likely over the age of 45, this cohort are cushioned by high incomes and significant savings accumulated during their working life, providing a financial safety net that was further bolstered during the pandemic from fewer travel and social occasions.

 

Fig 6. Cut Back cohorts by age

Consumers shoppers cut back cohorts by age retail economics

 

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​​The cut back economy landscape retail economics

Part 2 - The Cut Back Economy landscape

In this context, the Cut Back Economy principally refers to consumer behaviours that aim to reduce spending. This includes switching to cheaper alternatives, shopping or doing an activity less frequently, or cancelling expenditure altogether.

 

Quantifying the Cut Back Economy

Our research shows almost 9 in 10 (86%) consumers plan to cut back their spending over the next twelve months due to the rising cost of living. Of those planning to cut
back, more than a quarter (28%) intend to do so across all areas of their spending.

 

Fig 7. Of those consumers cutting back, more than a quarter plan to do so across all areas of their spending

Fig 7. Of those consumers cutting back, more than a quarter plan to do so across all areas of their spending

Fig 8. Size of Cut Back as a proportion of total household spending in FY 2022/23

​​Fig 8. Size of Cut Back as a proportion of total household spending in FY 2022/23 retail economics

 

The least affluent are projected to cut back 9.6% of their annual household spending, compared to 8.1% for the average household (Fig 8).

Even the most affluent (top 20% wealthiest households) are expected to cut back 7.6% of their spending, equating to a £2,654 reduction in value terms over the year.

Collectively, the overall impact of the cost-of-living crisis is set to wipe out a potential £24.9 billion of discretionary spending across UK retail, leisure and consumer industries in the financial year 2022/23 (twelve months to April 2023).

The scale of the Cut Back Economy also varies by different subsectors 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). Figure 9 explores this in more detail, showing what the Cut Back Economy looks like for different sub-sectors:

 

Fig 8. Size of Cut Back as a proportion of total household spending in FY 2022/23

Fig 9. Cut Back Economy by sector retail economics

Download this free report to view the other 12 categories: media, holidays, household goods, beauty, DIY, gardening, electricals, fitness, insurance, pets... complete the form at top of page... 

 

Cut Back sector focus

The weekly food shop is at the forefront of the Cut Back Economy. One in two UK shoppers are cutting back on food and groceries, more than any other retail and leisure sector. By trading down and economising basket sizes, the average household is looking to cut back £494, or £41 per month, on their food shop over the twelve months to April 2023.


Cut back intentions for food and grocery are highest among low-income households and the under 45s. The weekly food shop accounts for a significant proportion of spending budgets for these households, often young families with more dependents.

 

Food and grocery: widespread cutbacks

Food and grocery: widespread cutbacks

 

Major supermarkets are reporting widespread changes in shopper behaviour, including smaller basket sizes and customers self-imposing spending limits as they try to stick within their budgets. Spend on seasonal events such as Christmas will also be impacted, with shoppers unlikely to indulge as normal on premium products.

 

For most consumers, cutting back on the weekly food shop will involve switching to cheaper private-label brands or discounters (52%), making better use of loyalty cards/vouchers (40%) and buying in bulk more frequently (32%).

 

Financially Distressed households must go even further. A third of consumers in this cohort have already resorted to cutting back food consumption by eating fewer or cheaper meals this year due to cost of living pressures.

 

 

Fashion: Middle to higher income households cut back on new clothes

Among discretionary spending categories, clothing and footwear is at the top of consumers’ cut back priorities. Just under half of all UK households intend to reduce their spending on fashion during the cost-of-living crisis, with the average household aiming to cut back 10.6% of their apparel purchases.

Fashion retail has enjoyed a stellar bounce back over the last twelve months, driven by the return of social events, holidays and office working as pandemic restrictions eased. However, the sector’s recovery is now at risk, with the autumn and winter season set to be challenging for retailers as cost of living pressures intensify in the months ahead.

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.

Unlike groceries, the cut back in Fashion will be driven by middle-to-higher income households, rather than the least affluent. For low-income households, affordability already governs their customer journeys. Even in ‘normal times’ they have less scope to cut back as they already typically shop around for the best deals. Middle-to-higher income consumers have more opportunities to cut back in fashion as their spending habits are less considered, more impulse-driven, and more likely to be focused on premium brands.

Around three in five (58%) Gen Z (18-24 years old) shoppers plan to cut back on apparel purchases – more than any other age group. A third are open to... [excerpt]

 

Download this free report to access other sectors - Hospitality & Leisure, and Holidays...

 

 

Fig 11. Have you changed your holiday plans because of financial pressures this year?

Fig 11. Have you changed your holiday plans because of financial pressures this year?

 

Cut back behaviours retail economics

Cut Back behaviours

As consumers seek value for money from their retail and leisure experiences, the customer journey will become more complex and considered. Consumers will increasingly be open to scaling back spending, switching brands, and shopping around for deals. A deep understanding of these changing behaviours is critical for retailers and leisure operators to leverage emerging opportunities.

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.

However, the willingness to trade down to cheaper alternatives varies considerably by retail and leisure category (fig 12). More staple or social areas of expenditure (eg weekly food shop, restaurants and takeaways) are at risk of greater levels of substitution compared to more limiting areas for trade down options (eg cinemas, gyms), or where brand loyalty tends to be higher (eg electricals, pet supplies).

The bubble chart shows a correlation between propensity to cut back and willingness to switch to a cheaper brand. This suggests that consumers are more likely to cut back in sectors where they spend regularly and have greater ability/choice to trade down.

 

Fig 12. Consumers more likely to cut back in sectors where they spend regularly and have greater options to trade down

Fig 12. Consumers more likely to cut back in sectors where they spend regularly and have greater options to trade down retail economics

 

Scale back

43% of consumers plan to go shopping less frequently in response to the cost-of-living crisis. This has obvious implications for footfall, as retailers and leisure operators will need to provide stronger incentives for consumers to visit their stores or pay for their services.

Financially Distressed households are most likely to reduce the frequency of shopping trips. Interestingly, the Comfortable Cautious cohort intend to scale back on shopping trips and trade down more frequently than Squeezed Spenders,  despite being more financially stable (fig 13). This shows the psychological impact the cost-of-living crisis is having on  consumers, with emotional concerns driving intentions to cut back.

Our research also shows that a quarter of UK consumers plan to buy second-hand (or upcycled) more often, suggesting that the cost of living may inadvertently help accelerate the shift to a circular economy.

The resale or ‘pre-loved’ market offers an affordable shopping option to cash strapped shoppers, but also meets growing desires from consumers to minimise their impact on the environment as they become more conscious of issues around overconsumption.

 

Fig 13. Cut Back behaviours by cohort

​​Fig 13. Cut Back behaviours by cohort retail economics

Shop around

Two in five shoppers (39%) intend to do more research, compare prices and shop around for deals before committing to a purchase in the current inflationary environment.

The propensity to research and shop around is highest for categories where online plays a dominant role in the customer journey, such as fashion (55%), booking a holiday (52%) or ordering a takeaway (48%). Digital acceleration has given additional power and greater choice to consumers who increasingly use social media, search engines, and price comparison tools to inform decisions, find bargains and overcome the ‘tyranny of choice’.

Fig 14. Consumers more likely to shop around in categories where digital channels play a key role in the customer journey

Fig 14. Consumers more likely to shop around in categories where digital channels play a key role in the customer journey retail economics

When a shopper decides upon a particular brand and the purchasing decision has been made, there are additional cut back behaviours consumers are likely to adopt. For example, more than a third (36%) of consumers plan to use loyalty schemes
and vouchers more often when making a purchase, 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 for discretionary spending.

 

Explore the rest of this report...

Part 3: Retailer strategies to identify opportunities and risks

  • Customer-centricity to secure lifetime value
  • Data-driven decision making
  • Competitive-price-positioning
  • Rethinking supply chains
  • Implementing the ESG agenda

Conclusion

 

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About this report

This report produced by Retail Economics in partnership with Grant Thornton and looks at the impact of the cost of living crisis on UK retail, leisure and consumer sectors. It identifies the opportunities and risks for brands looking to navigate the Cut Back Economy in order to leverage a competitive advantage in 2022 and beyond.

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