Once Bitten

Why aren't consumers responding to stronger economic news?

At an event last week full of retail and ecommerce leaders, much of the conversation inevitably turned, as it always does to “how are you finding the market?”. It was striking that the answer to the question, regardless of what sector the speaker’s business was in, or whether they were traditional brick and mortar retailer or pureplay ecommerce specialist, was the same. A bit of a wince, and then some version of “we are getting by, but business is hard to come by and the market is quiet”.

That’s a reaction that chimes with the analysis of the ONS’s retail sales tracker which you may have read here a couple of weeks ago. That showed that across most retail sectors a period of revenue growth which had been largely driven by price inflation was more or less over, and that actual volumes of goods sold were flat to declining.

There are some notable exceptions, of course - computing and electrical looks to have had a stronger start to the year and if you sell anything which is likely to be boosted by sports (TVs, trainers and the like) then a summer of the Euros and the Olympics probably bodes well.

But for most retailers, business is much tougher than that. And that raises an obvious question - why? After all, the macro-economic statistics we keep reading about are all fairly positive right now - for the consumer, the worst of the inflation bubble has gone, interest rates are now flat and likely to come down, income growth is positive in real terms and energy costs have dropped a lot. All of this should translate into a much more benign market for retailers, restaurateurs and others serving the consumer sector but there is little sign of that if my brief survey last week is anything to go by.

I can offer a couple of reasons why that might be true. Here are three broad categories of explanation, in increasing order of potential seriousness:

The ‘micro’ factors

Every individual retailer I talk to about current trading performance inevitably orients their description around the short term factors that might be making them miss forecast. If you sell DIY or home goods, a period of good weather is bad news, for example, as everyone chooses to stay outside rather than do up their houses.

On the other hand, if you sell plants, garden equipment or barbecues then that same period of good weather is terrific news, and a rainy bank holiday weekend can spell disaster. Interestingly, so odd has the weather been this year that I’ve heard both complaints from different retailers - like Goldilocks, some have found the weather too hot, some not hot enough and very few seem to have found it just right!

Beyond the weather, other short term factors can also impact trading - the pattern of bank holidays this year is different to last, particularly taking into account the Coronation weekend, and that has made weekly forecasting this year more complicated. And now, of course, retailers up and down the country are scouring their historical data to try to figure out whether a General Election is good news or bad!

In the end, though, these specific factors impacting individual days or weekends should sort themselves out, and so whilst they might lead to an unusually bad (or unusually good) Easter or May Bank Holiday, that should all even out in the end, shouldn’t it? Well yes, as long as the underlying driver of poor trading isn’t a bit more structural.

The lag effect

Because another explanation for a lack of consumer spending is that the broadly positive macro-economic figures which we described earlier are just painting a misleading picture of what it is like to be a consumer today.

Inflation coming down, after all, doesn’t mean prices are lower - in fact, the compound impact of the last couple of years is that prices are much higher than they were pre-pandemic and it will take a while for increasing incomes to catch up with that.

Even more starkly, the stabilisation (and hopefully soon reduction) of interest rates seems very distant from the daily experiences of real consumers. If you are re-doing your mortgage right now having spent the last few years on a fixed rate, you are in for a big increase in your bill even if things aren’t quite as a bad on the mortgages market as they were 6 months ago.

In the round, then, there is a good chance that the feel-good factor that positive economic news should bring to consumer spending will take a while to feed through, and that we are therefore in for a few more quarters of dampened spending behaviour before we get there.

Unless it is worse than that:

Changed behaviours

Those of you who were around for the 2008 ‘global financial crisis’ will remember something that might be relevant again today. The long run up to 2008 was a period of increasing incomes, high government expenditure on public services and historically low interest rates. House prices were rising continuously and consumers felt wealthy - arguably wealthier than they really were, with the availability of easy credit and the feeling that houses were somehow wealth, rather than just somewhere to live.

All of that changed in 2008, almost overnight, and it had a scarring impact on consumer behaviour. The realisation that savings might not be safe, that houses could go down in value as well as up, and that having a high level of household debt might come back to bite you in the end made us all more cautious, and that caution arguably represented a structural shift in the economy with a lasting impact on productivity and GDP growth.

The really scary question for anyone in the consumer-facing industries, then, is whether we have seen a similar lasting shift in consumer behaviour now. Has the instability of the last few years, the shock of the pandemic and the rapid shift from very low interest rates to more historically normal ones not only suppressed short term spending but also shocked consumers into taking a more cautious approach with their money? And if it has, how long will that changed behaviour last?

Navigating the next few months

Which of these three possible explanations for current spending patterns is the correct one? I don’t think any of us know. Hopefully a period of calmer and more stable government will help, as will the gradual impact of real income growth feeding through into consumers’ perceptions of their wealth.

And you never know, we might get that period of ‘just right’ weather that we’ve all been waiting for!

In the meantime, retailers and hospitality businesses are going to have to navigate the next few months very carefully, remembering the critical importance of cash management but also being as creative and thoughtful as they can be with their marketing strategies in order to try to at least outperform their sectors.

It is an old retail adage that you should focus on the things you can control, but it has never been more true than today.

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