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Wednesday, August 10, 2022

Shopping: cost of living crisis hits people ‘urgently and directly’ – Q&A from a retail expert

Apart from runaway inflation, strikes, a downturn in business and rising interest rates, bad news about our buying habits was almost inevitable. The volume of goods sold in the UK is currently falling, according to the latest monthly data from the Office for National Statistics (ONS), with food purchases primarily to blame.

Consumer sentiment is at an all-time low for the second month in a row, according to the closely monitored GfK consumer sentiment survey. People are sadder now than they were at the height of COVID or even during the global financial crisis.

As the UK economy appears to be already in the early stages of a recession, we asked retail specialist Professor Lee Sparks of the University of Stirling for his opinion.

What is the big picture?

Times are tough as people begin to feel the effects of skyrocketing prices for consumer goods, energy and gasoline – this morning in Sterling, a liter was £1.97. If your benefits are going down, or you’re paying more National Insurance, or your salary isn’t keeping up with inflation, your income has dropped. It was a multiple shock for people – in a very short period of time.

Particularly in food, patterns are starting to change. We are seeing budget cuts – for example, reports of people returning items to the checkout when their purchases reach £30. There is some evidence that people are switching to cheaper brands and stores. Convenience stores are faring much better than big-box stores as consumers look for discounts and great deals. In addition, ONS retail sales figures are often revised down.

UK Retail Volumes (YoY)

Economics of trading/ONS

Why do grocery shopping lead to a drop, and not non-essential items?

Because the cost of living hits people very sharply and directly. Food makes up a much larger percentage of retail sales than other categories and is rapidly increasing in value. Ukraine strikes at everything related to grain. The farming-related agricultural index is showing ridiculous spikes.

Heatwaves in places like Spain are not helping. Some UK businesses that grow large quantities of greenhouse tomatoes, peppers, etc. have not been included this year due to rapidly rising energy prices.

Total sales of non-food items in the ONS data have not changed, but vary significantly between categories. Clothing has increased, although this may well be seasonal. This is offset by a fall in home goods, furniture and outreach stores – large purchases are being postponed.

How does this compare to previous crises?

A 40-year high in inflation and a low in consumer sentiment in a survey conducted some 50 years ago suggest that these are very difficult times. It also happened against the backdrop of the pandemic, Brexit and a decade of austerity. As a result, people are much less resilient, so it affects them faster than it could.

The surge in energy prices is comparable to 1973, and inflation was close to 20% in the early 1980s, but fears about what will happen next influence consumer behavior. If food supply remains a problem due to the pandemic, war and global warming, what then?

GfK data shows that consumers are already feeling the negative impact, but even more negative for them is the macroeconomic situation in 12 months. They look at the dramatic increase in the cost of living and fear that it will continue.

Is consumer sentiment too negative?

The macroeconomic outlook may be overly negative. In the by-elections in Tiverton and Wakefield in the UK, many voters said on their doorsteps that the government was doing nothing to lower the cost of living. It’s hard to see if the media is exaggerating because it fits the current narrative, but people definitely have reason to be concerned.

The geopolitical situation may worsen the situation, especially when winter comes and energy demand rises. I would also point to the massive use of food banks: the number of people struggling out of poverty is steadily increasing, so they are starting from a low base.

Which retailers will be winners and losers?

The cost of heating, lighting and electricity for retailers is rising. And, unlike households, there is no upper limit on energy prices for businesses. So now that consumers are also cutting back on spending, all retailers’ calculations of costs and revenues are changing.

Budget retailers such as Aldi, Lidl, Home Bargains and B&M will benefit from this. Among other large retailers, those that provide good discounts, such as loyalty cards or their own brand products, will hold out best. In categories such as furniture, homewares and large purchases, there is an opportunity for retailers to offer good prices – for example, Dunelm.

Customers And Staff At The Aldi Checkout In Leeds
Aldi could overtake Morrisons to become the fourth largest supermarket chain in the UK.
Paula Solloway/Alami

When it becomes difficult to comment on individual retailers because you don’t know their stock position. Many may have a hangover from COVID and therefore incur high capital costs. They will have to make difficult selling decisions, so there can be real deals for consumers.

Are we expecting collapses?

In recent years, there has been a shake-up of companies that either built too many stores, had high costs, or simply weren’t that good. So there may or may not be victims.

Most management teams have never had to trade in a high inflation environment. How fast teams adapt determines whether they survive or not. For example, high inflation changes how you should manage cash flow. It changes the price at which you buy shares, how long you are willing to hold them, and how much you are willing to pay for holding them.

Is there a case of optimists?

There are still people who have money and are looking for interesting things to buy. During the pandemic, we have also seen good results from local independent companies, and people thinking locally, acting locally and spending locally are highlights.

More generally, if we get the upper hand on energy costs, including gasoline, it will be a big shift: it will make consumers more positive and lower inflation, and therefore some narratives will improve.

World Nation News Desk
World Nation News Deskhttps://worldnationnews.com/
World Nation News is a digital news portal website. Which provides important and latest breaking news updates to our audience in an effective and efficient ways, like world’s top stories, entertainment, sports, technology and much more news.
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