Webloyalty Easter Retail Report - an economic update for 2014

Economic update Current state of retail economy

2014

Economic update

Page 5

2014Looking ahead ... Easter

March 2014

© 2014 Webloyalty & Conlumino [email protected] | 020 7291 8720

The economy and consumer sentiment

Auspicious signs

Following one of the longest and deepest recessions on record, signs of recovery, however modest, are extremely welcome. Certainly the early stages of 2014 have already shown up some auspicious indicators with falling levels of unemployment, rising GDP and even a long-awaited slowdown in inflation. Indeed the Office for Budget Responsibility (OBR) forecasts GDP growth of 2.4% for 2014, although real GDP is still 2% below its 2008 peak.

An unbalanced economy?

The UK economy grew by 0.7% in the third quarter of 2013, making it one of the fastest growing of the major world economies. Nevertheless, fears remain that the recovery is an unbalanced one, over-reliant on consumer spending, fuelled by unsustainable house price growth and financed by a sharp fall in the savings rate. Falling productivity In August 2013, the Bank of England’s Monetary Policy Committee stated that it would not raise interest rates until the unemployment rate fell below 7%. It was assumed that this would not occur until at least 2016, an assumption that was based on the notion that growth would be driven by improving productivity. However, stubbornly high inflation and the rapid fall in unemployment, to 7.1% in January this year, suggest that in fact productivity has weakened.

It is in part this lack of productivity that explains why the UK has experienced such stagnant growth in real wages, leading to one of the longest declines in living standards in 60 years. Low productivity is especially worrying as it could result in the recovery running out of steam thanks either to a spiralling burden of debt or the BOE being forced to raise interest rates to head off the pressure of inflation. The latter in particular would have an immediate dampening effect on retail spending growth. Current account deficit worryingly high Further cause for concern comes in the form of the UK’s poor performance in the export market. A current account deficit of 5% of GDP suggests that import spending greatly exceeds exports; a trend that is both unsustainable in the long term and could lead to the devaluation of the pound. The challenge facing the UK economy lies in rebalancing the recovery away from consumer spending by boosting export growth. There are signs that exports to emerging markets are on the increase though the UK still lags behind many other Western European economies in this regard. Over the next few pages we will take a more in depth look at some of the key issues in the UK economy and consumer sentiment and how they are likely to impact upon retail.

Signs of modest recovery but there are likely to be bumps in the road ahead Positive indicators may be masking the true state of the UK economy as fears emerge over an unbalanced recovery

Economic update

Page 6


March 2014



With wage growth remaining stagnant during the recession, rising inflation levels have placed a significant strain on consumer finances.

Persistently high inflation in the cost of living, particularly in areas such as household utility bills has eroded household budgets to such an extent that retailers are having to discount heavily to stimulate demand. In January the BRC unveiled figures which showed that shop prices had fallen for the ninth consecutive month with the sharpest rate of deflation since December 2006. Furniture, clothing and electricals all witnessed significant price softening while even in the food sector, which has spearheaded retail inflation in recent years, the rate of inflation slowed down. What does it mean? Stable commodity prices and favourable forecasts going forward are helping retailers to keep prices down, but until the economic recovery filters through fully to the level of consumer finances and the cost of living begins to fall, retailers are likely to have to continue to take a hit on their margins .

In the grocery sector falling consumer loyalty and a greater propensity for consumers to shop around in search of the best deal is forcing more established retailers to re-evaluate their proposition in the face of rising competition. Last year Tesco unveiled its vision for the future of big box retail, while Asda will attempt to combat its lack of physical presence in the convenience market with an ambitious strategy to broaden its click & collect offer. As the high street comes under increasing threat from online retailers, Argos is busily undergoing its transformation to a digital retailer, whilst across the board retailers are beefing up their multichannel competencies. Retailers, like Dunelm, are also looking at greater direct sourcing and better space management to boost flagging margins. What does it mean? In the context of this squeeze on consumer finances, retailers are finding volume growth to be an elusive commodity. As the fight for consumer spend becomes increasingly hard fought, this in turn is fuelling innovation.

Shop price deflation as retailers compete to stimulate demand.

A competitive market is forcing retailers to innovate.

Economic update

Page 7


March 2014



In comparison with the recent slowdown, the housing market is buoyant: 2013 saw a considerable rise in mortgage transactions in an indication both of strong demand and a willingness of banks to provide finance, while house prices have risen nearly 8%. The strength of the housing market is also its biggest weakness, however, with real fears that rising prices are causing many properties to be unaffordable, particularly in regions of persistently high demand such as London and the South East. There are warnings that the price rises are unsustainable with the government’s Help to Buy scheme fuelling a housing bubble, while interest from wealthy foreign investors in the London property market may be propping up prices. What does it mean? Greater momentum in the housing market should provide a long-awaited boost for home and furniture retailers that have been particularly hard hit by the recession. While this has inevitably been helpful, the pace of housing growth in many regions remains sluggish by historic standards.

In January this year UK unemployment fell to 7.1%, close to the threshold at which the Bank of England has suggested it would raise interest rates. There are concerns though that the manner in which this low rate of unemployment has been achieved owes much to a rise in part-time employment and the popularity of temporary contracts, whilst at the same time there is a generally higher level of job insecurity in the market together with falling productivity. Added to this, the pattern of falling unemployment is far from uniform and pockets of high unemployment are particularly prevalent in the North of England, the inner cities and amongst young people.

What does it mean? It may be a flexible labour market that has led to the rapid fall in unemployment but jobs are still jobs and higher rates of employment will boost household incomes and improve consumer sentiment. Worryingly low levels of productivity mean that wage growth remains sluggish, however.

Housing market momentum, but fears of a house price bubble.

A dramatic fall in unemployment, but is that the whole story?

Economic update

Page 8


March 2014



Key economic indicators 2014 compared to 2013

Economic indicators 2013 2014

Gross Domestic Product growth (%) 1.4% 2.4%

Since the end of 2012, the economy has shown some signs of life with modest GDP growth and a rise in consumer sentiment. While this appears to be sustainable, and is welcome, the magnitude of the pick-up is shallow.

Unemployment (ILO definition – Q4 %) 7.6% 7.1%

Despite pressures on government expenditure having a negative impact on public sector employment, there are signs that, for the time being at least, the private sector is largely picking up the slack.

Inflation (CPI – annual %) 2.6% 2.4%

Persistently high inflation, particularly for food and energy, which represent such a significant proportion of overall consumer expenditure, will continue to put household budgets under pressure.

Interest rates 0.5% 0.5% With the recovery looking shallow, interest rates are highly likely to remain stable for the foreseeable future.

Disposable income -0.2% 0.3% While wage growth continues to pick up, disposable incomes continue to be held back by high inflation.

Economic update

Page 9


March 2014



•  However, views on personal financial circumstances have not fared quite so well. Notably, in recent months, views on the overall economy have become stronger than views on personal financial circumstances. This is a reversal of the position we have seen during most of the downturn.

•  There are numerous factors making consumers less certain about their personal finances. Foremost among these is high inflation which is squeezing disposable incomes.

-32.1

-53.4 -51.3 -48.3 -40.8 -39.2 -37.7

-20.9

-36.9 -37.8 -45.0 -43.9 -43.1

-28.0 -26.0 -28.8

-6.0 -7.3 -9.2 -3.5 -6.3

-2.0

7.1 -14.3

-31.4 -29.3 -30.7 -27.7 -23.3 -25.3

-21.0 -27.9 -28.7 -29.0 -32.0 -29.6

-24.9 -22.0 -24.0

-17.3 -19.5 -19.9 -18.6 -21.0 -18.6

-10.7

-60

-50

-40

-30

-20

-10

0

10

20

•  Aside from more general economic indicators, one of the most important considerations in terms of the future strength of retail is how the consumer feels.

•  Positively, views on the future of the overall economy have seen some solid improvements over the past few months. This outlook has been fuelled by the more affluent regions and higher social classes in particular.

Consumer sentiment swings to positive Personal finance continues to be a concern

Consumer confidence index All figures are an index created by taking those who say things will improve and subtracting those who think things will get worse

Index on personal finances: how do you think your own personal financial circumstances will change over the next 6 months?

Index on the general economy: how do you think the economy will change over the next 6 months?

Economic update

Page 10


March 2014



UK’s North South divide shows in consumer confidence Views by demographics and region

While overall consumer sentiment now finds itself in positive territory, it is men as a whole who are driving this consensus with their more positive outlook on the economy. Conversely women, who are traditionally more involved with more non-discretionary purchases, are notably more pessimistic about the economic future.

Affluent consumers have a much greater positive economic outlook than those people with less. The latter will be experiencing a much tighter squeeze on their disposable income, as their levels of discretionary purchases are expected to rise.

There are also strong regional differences in future economic outlooks. Unsurprisingly, regions associated with tougher macro-economic climates are less optimistic. The South has higher levels of disposable income, and non-discretionary purchases will affect them less, leading to more positive economic projections.

Gender

Affluent and not so affluent

Region

Women -2.5

Men +18.4

DE* -0.8

C1+C2* +10.7

AB* +20.4

+4.0 North West

+12.2 London

+13.2 South East

+11.9 South West

-17.2 North East

Despite the overall economic outlook being quite positive, the view is not universal. Here we take a closer look at consumer sentiment across a range of demographics.

All numbers refer to the overall economic index; the average score for views on the future of the general economy in January. The overall average index for this is +7.1.

A High managerial administrative or professional B Intermediate managerial administrative or professional C1 Supervisory clerical and junior managerial administrative and professional C2 Skilled manual workers D Semi and unskilled manual workers E State pensioners, casual or lowest grade workers and unemployed

*

Economic update

Page 11


March 2014



•  One of the factors weighing negatively on consumers’ minds when it comes to personal financial circumstances is the prospect of future inflation.

•  The large majority of consumers still believe that many, non-discretionary areas of spend (like utility bills and food) will rise sharply in the next six months.

•  This expected rise in essential living costs will inevitably erode disposable income. It is no surprise that consumers’ views on future personal finances are relatively bleak.

•  Although consumers are less pessimistic about

discretionary areas of spend, such as electronic gadgets and homewares, they still believe that these things will be generally inflationary.

5.4 Petrol or diesel

Food

Clothing

Electronic gadgets

Homewares

54.9

3.1 63.5

5.7 30.9

11.3 25.7

4.7 24.1

Expecting a fall (%)

Expecting a rise (%)

Household utility bills 2.9 66.4

-49.5

-60.4

-25.2

-14.4

-19.4

Net difference

-63.5

Personal circumstances still weigh negatively on consumers’ minds The squeeze continues

Percentages of consumers expecting a rise and fall in prices across certain products and services over the next six months.

Data & Analytics

Webloyalty Easter Retail Report - an economic update for 2014