2015 was a good year for consumers as real pay increased 2.8%. However, with many still hurting from a median 10% pay decrease since the recession and high levels of debt, excess money is being repaid to their past and invested in home infrastructure maintenance. Retail spending has therefore not improved significantly from the changes, research by KPMG and Ipsos shows. Looking forward, the researchers expect 2016 to remain a tough year for retailers as law and tax changes further eat into margins, while consumers remain prudent about their disposable income.
2015 saw consumers generally better off than the year previous as a tightening labour market and low inflation finally saw to an increase in real wages. In recent analysis from KPMG and the Ipsos Retail Think Tank (RTT), the effects of the increased consumer power are considered across 2015, as well as some predictions about consumer behaviour for the coming year.
Real wages were up 2.8% in 2015 on the previous year in the UK, following improvements to employment levels driven primarily by the private sector. Lower energy costs too have put more spending power into consumers’ pockets. Following the general election, consumer confidence is now at close to record highs and demand for credit continues to strengthen.
Yet while disposable income has increased, consumer behaviour has – as a result of the crisis – changed markedly. Consumers are prudently paying down debt built up over years of falling pay, with the median income down 10% in the UK. In addition, investment in home infrastructure upgrades is soaking up any excess cash held by consumers.
Money is, in particular, not filtering through to retailers. Neither FMCG nor food retailers have seen significant increases in consumer spending following their increased buying power. According to the research, this year will continue to see pressure placed on these two groups from varying quarters. The EU referendum is expected to create uncertainty that may decrease consumer confidence, while expected rates rises in the UK are expected to hit both retailers and consumers.
The retail sector will need to find a way of absorbing the increase in minimum wage set to come in this year and those following. The changes have ramifications through a knock on impact on, inter alia, pay differentials, staff discounts, tea breaks and pensions. The council review of council tax charges has levelled at businesses. The positive side from the changes is that for a large consumer segment, more money will enter the economy that may again end up in the retailers’ pockets.
Given the changes, a level of uncertainty is expected to follow. Whereas companies will seek to maintain their margins by passing on increased costs to consumers, the move will likely increase inflation, as well as reduce the incentive for consumers to purchase. Both leading to a further decrease in demand. Finding ways to reduce costs while increasing productivity is, according to the survey, potentially a better way to go.
The large hit in the real income of consumers has also seen other changes to their behaviour. Today, consumers tend to more often plan spending in advance, leveraging online resources to shop around for the best deal before buying. This has created a group of discount junkies, according to the researchers. To wean consumers off this trend, thereby increasing margins, KPMG points to improvements in personalisation. This way, discounts can be targeted more discriminately based on loyalty.
The research finds that for the economy as a whole, there is enough to be positive about as consumer spending power increases. Whether retailers will see any of that money, as consumers pay off past debts and invest in long overdue upgrades, is something to be seen. “While 2016 is likely to be a much more positive year in growth terms, not all retailers and sectors will benefit,” explains Maureen Hinton, Global Research Director at Conlumino. “An improving economy will not solve the problems of how to deal with the fundamental changes in how consumers shop, and the rising costs of meeting their expectations.