For those that don’t know KBO stands for ‘keep buggering on’ and was a favourite phrase of a certain Winston Churchill and whilst he isn’t somebody I would normally reference I do think the sentiment has merit as we begin to trade our way through 2023.
I have been on a number of webinars over the last week or so and I think the one thing most had in common was that the economic outlook for the next few months isn’t looking too rosy. There is some cause for optimism, but it seems the promise of ‘jam’ is a little while off yet.
So why is it looking so gloomy for the next few months?
1. Negative Retail Growth in Real Terms
For the first part of 2022 actual retail sales were trending ahead of inflation, meaning that even if you factored in that inflation retail sales in ‘real terms’ were still increasing. This started to change around the summer as the rate of inflation pushed past the rate of sales growth, meaning that in real terms whilst pound amount sales were up year-on-year the actual volume in real terms was less.
As you can see this really hits home in the first half of 2023. Even though inflation is beginning to fall gradually, sales are predicted to fall at a steeper rate, actually pushing retail growth in real terms to -6% in the early part of the year.
The trend is (thankfully) expected to be more positive through the second half of the year, with the prospect of real-term Retail growth by the end of 2023.
2. A double whammy to spending
So what is sitting behind this prediction of falling retail spend? Well as you would expect it’s a number of factors coming together to create that oft-referenced ‘perfect storm’.
Firstly a lot of the pandemic savings buffer has unwound. There was a lot of talk as we came out of lockdown of pent-up consumer demand, that would be enabled by all those fivers and tenners that hadn’t been spent on two years worth of all manner of social interaction and holiday-ing. The fear is that this piggy bank is now empty, with a sizeable amount swallowed in the inflated costs of the last year or so.
Feed into this a cost-of-living crisis that is impacting middle-income households more proportionally than has been common in other recessions, largely due to energy & fuel, and you have a large percentage of the market tightening its belt.
Hence the reason why the consumer confidence index is at its lowest for 50 years, and considerably lower than any other period of downturn since the mid-1970s.
Expect consumers to be seeking out value in the first half of 2023, with a reasonable expectation that increases in unit pricing may result in an equal or greater reduction in demand for that SKU as punters seek out cheaper generic or unbranded alternatives.
Proof of this is illustrated in the following graph, which plots the recent sales performance of a number of retailers that position themselves largely on price and value. In all cases, recent performance is exceeding current average rates of growth for food & non-food respectively.
3. It’s not just products that are increasing in price.
The cost of doing business is also under significant pressure for the foreseeable. Whilst there is some good news around business rates rebates, the end of the current Energy Support Package will hit most businesses very hard and is much publicised.
Somewhat less talked about is the increasing cost of securing sales, particularly for online resellers. Estimates suggest that digital customer acquisition costs have increased by 60% in the last five years. And it’s not just selling out that is more expensive, with the cost of returns also impacted by higher shipping and restocking charges.
And of course, labour inflation is currently around 4-5% and is likely to go up rather than down in the coming months.
Back to Winston then.
The picture looks far better as we head to 2023, inflationary pressures will become less dramatic and although we are probably going to have to factor in increased energy costs for the medium term we are already seeing falls in raw material and freight costs which will begin to work their way through.
Whilst in the real world isn’t as simple as ‘just get through the next six months’ that really is the underlying message from most commentators. Many High Street Retailers are focussing on upgrading loyalty and retention programmes and drilling down on propositions around value, in an effort to keep consumers spending with them in the short term.
