UK households 25% better off in 2009
Ernst & YoungÂ’s Annual Discretionary Income Study, launched today, reveals that typical household discretionary income has risen dramatically over the last twelve monthsThe average UK family with a mortgage is now 25% better off each month than it was last year, assuming no change to employment status. Therefore after tax contributions and monthly bills, the average household now has over £200 a month more left over compared to 2008. The increase is driven overwhelmingly by lower mortgage repayments in line with historically low interest rates, other costs such as petrol, electricity and gas have also fallen from last year's peak.
Jason Gordon, retail director at Ernst & Young comments: “Even though we're still in recession, many UK householders who have not been hit by unemployment have experienced a dramatic upturn in their monthly budgets over the last year.
“However, the figures clearly do not tell the full story. Although a typical consumer (with a mortgage) may now have more money to spend on a monthly basis, the sharp house price declines of the last 12 months have significantly eroded their overall wealth.
“In addition, alongside falling house prices, the bleak economic climate and fears of job losses have had a devastating impact on consumer confidence. Consequently, many consumers are using their increased monthly spending power to repair savings balances and pay off credit cards and other debts. These gains are certainly not being spent freely on the high street.”
Monthly discretionary income for a typical household has risen 25% since last year. The average household now has £1075.22 to spend each month after total fixed monthly outgoings, compared with £859.32 in 2008. This represents 27% of gross income, up from 22% in 2008/09.
Fixed monthly household costs have fallen by almost 8% over the last year, driven predominantly by lower mortgage repayments.
Average monthly mortgage payments (based on a 25 year repayment mortgage at the standard variable rate) are £553.58, a massive 20% lower than last year. Homeowners with mortgage deals tracking the base rate will naturally have enjoyed even greater reductions in monthly mortgage payments.
Petrol costs have fallen by more than 5% and now account for £164.10 of a typical household's monthly budget (based on a mid-sized car with annual mileage of 15,000).
Average electricity and gas prices have fallen by 8% and 5% respectively since their 2008 peak. But total energy bills (gas and electricity combined) are still 53% higher than five years ago.
In spite of these cuts in household bills, some individual costs have continued to rise in 2009, albeit at a relatively modest rate. For instance, typical households have seen rises in council tax (+3%) buildings insurance (+3%) and public transport (+6%) over the last year.
Gordon adds: “In recent weeks, there have been some tentative signs of stability in the economy and the housing market. Consumer confidence has also picked up from its all time low. However, it remains to be seen whether these indicators translate into a sustainable recovery. Until they do, it's unlikely that consumers will rediscover their appetite for 'retail therapy'.”
Retail sector increasingly polarised
With most consumers reining in their spending despite gains in monthly discretionary income, retail sales have come under enormous pressure over the last year. However, this picture is far from uniform. Gordon comments: “Although overall like-for-like sales have been consistently in negative territory for 12 months, we've seen a rapid increase in the pace of polarisation across the retail sector.
“On the one hand, sales at supermarkets, value-based retailers and specific market segments such as young fashion have held up very well. In contrast, highly discretionary purchases such as jewellery, big ticket items and those linked to the housing market have suffered - for example electricals, furniture and DIY. We expect trading in these sectors to remain tough in the second half of 2009.”
Responding to recession
Recession and the recovery period inevitably sharpen the focus on business fundamentals. In particular, effectively controlling four key 'levers' (sales, cash, costs and growth strategy) will go a long way in determining the retail winners:
Sales - Maximising the sales line through product development, exploiting customer insights and capitalizing on tactical initiatives such as guerrilla marketing are all paramount.
Cash - The overused phrase 'cash is king' is actually more appropriate than ever - at the very least, retailers should be gaining visibility via daily cash balance forecasts, reducing inventories and revisiting supplier terms.
Costs - Rigorous control of costs goes without saying, particularly in the major areas of staff, product and property.
Growth - It's imperative to have a strategy for growth in place now, in order to seize the opportunity once liquidity returns to the credit markets - international expansion, multi-channel, format and range extension as well as acquisitions will all come to the fore in the recovery phase.
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