You are here: Home | News | UK consumers under increasing pressure
UK consumers under increasing pressure
Ernst & Young's Annual Discretionary Income Study, launched today, reveals that UK consumer spending power continues to decline.
The average UK household now has a lower proportion of its monthly income to spend on discretionary purchases than at any time in the last five years - after tax contributions, mortgage payments and monthly household bills, the average family now has just over 22% of its gross income left over, as opposed to over 28% in 2003.Tim Sleep, director of Retail at Ernst & Young comments: “Big rises in household costs continue to outstrip wage inflation. Increasing mortgage pa
“But we're also seeing above inflation rises on a host of fixed costs such as council tax bills, water rates, pension contributions and petrol - the consumer is being squeezed from many directions.”
Declining Discretionary Income - Impact on Retail Sector Performance
The level of discretionary income is clearly a key driver of retail sector performance. Sleep comments: “In the face of rising consumer costs, sector performance has held up quite well in the early part of 2007.”
However, with little expectation that the major household are going to ease in the foreseeable future, Ernst & Young sees no improvement to the underlying retail climate.
Sleep adds: “Consequently, we expect sector like-for-likes to continue to trend at around 0% - 2%, or worse if there is a further rate rise, and the gap between winners and losers to grow ever wider.”
Retailer Response
Retaining customer loyalty and driving sales growth in such a competitive market is no mean feat. An uncompromising focus on cost cutting and driving efficiencies throughout the business are obvious prerequisites for all retailers all of the time, but never more so when consumer confidence is fragile. And getting the retail fundamentals right in terms of product, channel and customer service have to be seen as a 'given'. However, in the context of declining consumer spending power, two areas stand out where retailers can still make some major gains, in order to boost sales and profits.
Adopting a more scientific approach - Retailers generate huge amounts of data yet few really leverage it effectively to support improved commercial decision making. In particular, getting the pricing strategy right, in terms of initial pricing, as well as promotions and markdown management, continues to elude many retailers. Developing a detailed understanding of consumer behaviour and buying patterns lies at the heart of any successful pricing strategy. By assessing the drivers of consumer demand, such as seasonality and price elasticity, retailers would be much better placed to optimise pricing.
Tim Sleep comments: “Winners in this tough environment have to get more much more scientific in their approach to pricing - that may mean earlier discounts to shift old stock, or even differential pricing across store formats and locations.
Exploring potential international opportunities - Whilst the UK represents a mature market with a fragile consumer, price deflation, and intense competition, opportunities overseas offer the prospect of strong growth. In particular, the size of the prize in many emerging markets can be huge, notably in Eastern and Southern Europe and Asia, where there is massive consumer demand for Western brands but still a low penetration of organised retail. Tim Sleep comments: “There's no denying that for many emerging markets, the time is now. Early movers have already proved the attractiveness of markets such as Russia, India and China but competition has yet to peak. Of course there are huge challenges taking your brand overseas but these markets offer the prospect of strong sustainable top-line growth - something that certainly isn't true of the UK.”
Tagged as: ernst and young
Should your colleagues be reading the Retail Bulletin? Let them know about us.