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Q4 2016

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In this edition of the Quarterly Trends Analysis we open with an overview of the quarter in retail. With Q4 the most important quarter of the year, including both Black Friday and the festive sales period, we track the movements of retail KPIs over the Autumn and beyond.

In section 2 we examine the investment pattern within the retail industry over the long-term. Through looking at investment data, we show how the spending priorities of retailers have changed over time to invest in new technologies.

Section 3 presents an analysis of what to expect from Donald Trump’s imminent presidency. What does this mean for the UK economy, and retail in particular?

In Section 4 Lisa Luu from Hitwise examines the new healthy living trend and its growth to capture the majority of online searches from fad diets. In Section 5 Gemma Noble from Springboard provides an overview of footfall in Quarter 4. In Section 6 Richard Perks from Mintel analyses the pricing strategies of retailers, and their effect on shoppers. Finally, in Section 7 the KPMG-IPSOS Retail Think Tank offer their views consumer confidence indices, and their accuracy in describing consumer behaviour. We include tables of economic and retail industry data at the end of the report.

This report draws on data and analysis from our regular data and insight publications and our upcoming releases are shown in the table on page 16. For data and analysis of current economic conditions, take a look at the November edition of the Economic Briefing report on our website.

If you need further information on any of the material in this report, or would like to make suggestions or comments for future editions, please get in touch.

Anoush Darabi

Junior Analyst, Retail Insight and Analytics

retail.insight@brc.org.uk

Q3 2016 GDP growth

Total retail sales growth in December (YoY)

Shop Price Inflation December 2016 (YoY)

Footfall December 2016 (YoY)

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There was some trepidation from retailers in advance of Christmas 2016. With Christmas day falling on a Sunday, there was a full shopping week in the run-up, allowing for last minute purchases until closing time on Christmas eve, and an anxious biting of fingernails from retailers as they awaited these delayed sales. Using the data from our monitors we have constructed an account of the Christmas period and its immediate aftermath for retailers – what people bought, how they bought it, and where they bought it.

The curiosity which anticipated retail sales figures in December was driven by speculation as to whether Black Friday, which had continued to drive growth in November, would eclipse Christmas growth and sales figures. This has been the case in previous years. Furthermore, the timing of the day itself, Christmas falling on a Sunday in 2016 and giving shoppers two extra days in which to cram in their shopping, meant retailers faced a tense period of waiting for the sales glut to arrive.

In the end, the sales came through making the end of 2016 a particularly strong one for sales. Alongside better-than-expected GDP growth in Q3, this suggests that the economy, and shoppers, have felt little impact from the Brexit vote in June.

In December itself, growth in the pre-Christmas week saw by far the highest overall growth in all of the categories. The value of sales in this week eclipsed Black Friday, reversing the trend of a number of years when Black Friday has attracted more purchases than any week in Christmas. This was the result of shoppers thinking with their stomachs – food contributed by far the largest proportion of overall growth, and helped to compensate for a decline in other non-food sales. The Health & Beauty category finished off its strong Autumn with style, special gift bundles and products, fragrances, and skincare proving almost irresistible in the run-up to Christmas.

Online, gifting categories sat at the top of the growth rankings – Toys & Baby Equipment, Health & Beauty, and Other Non-Food, the latter contributing almost half of the total growth rate of 7.2%.

Unlike for total sales, Black Friday remained far more important for online sales this year than Christmas – the penetration rate in November (the proportion of total sales made online), was 27.6%, while in December it was 24.3%, and there was a greater volume of online sales in the Black Friday week than the week before Christmas, or indeed any week in December.

This should not take away from the importance of December’s online performance - a higher proportion of total sales than ever before was made online in December, at 24.3% nearly one in every four pounds. Extended and more reliable delivery guarantees encouraged shoppers to buy online until the Monday the 19th, after which online transactions dropped sharply.

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The Shop Price Index showed that prices fell again in December, as they have been for over three years. However, a closer look shows some sign of a shift in momentum. The overall y.o.y deflation rate of -1.4% was a deceleration on both November and October, and non-food deflation of -1.9% y.o.y was the lowest rate since June 2015.

This slowing of the deflation rate was a result of many categories within non-food seeing month on month price inflation – clothing and footwear, furniture, electricals, and DIY were all more expensive in December than November. Retailers do like to sell at full-price in December, perhaps reflected in these price rises. We should be cautious in approaching these figures as the beginning of price increases – January, and its sales, could see a drop on December’s prices.

Nevertheless, the drop in the value of sterling since the vote to leave the EU in June has been causing headaches for retailers – with competition so high, and the cost of imports vastly increased, it can only be so

long before we see price rises come through. Retailers are yet to see cost pressures hit home – many have indicated that they are selling stock they bought before the sterling devaluation, or are hedged until various points in 2017. But this slowing of the deflation rate in December could very well be the moment the stone started to roll back.

Footfall has fallen over the past few Decembers, with what growth there has been reserved to Retail Parks over the High Street or Shopping Centres. This December bucked the trend – while there was a decline in overall footfall, the High Street saw an increase: the first growth in December since 2011.

This was built on six out of the ten nations/regions where footfall is measured saw an increase in High Street footfall in December. There are a number of reasons as to why this could be – better strategies from High Street retailers to get people into their stores, the knock on effect from people hitting the High Street for leisure activities, or simply the way Christmas day fell within the calendar this year. With two extra shopping days in the week before Christmas, shoppers may have delayed their purchases until this week, or even booked time off work to get their shopping in.

The weekly data from Springboard shows high footfall in the Christmas week rising until Friday 23rd December, a pattern which has existed for a number of years. This year, Thursday saw the highest spike in footfall. As suggested by the calendar beforehand, this long week before Christmas drew the most footfall, and was likely put aside by shoppers in advance as the week they were going to head to the shops.

Christmas this year remained a story of shop floor and supermarket sales. High street footfall picked up, and the best food three-month average for over three years.

Online is capturing an ever-greater proportion of December sales, but last-minute Christmas shopping should see the high street maintain its sales grip of Christmas week for a while yet.

The economy continues to show little sign of any change resulting from the decision to leave the EU in June, though the pound continues to lag behind its pre-vote value. What is clear is that online and physical

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platforms are changing, and working together to give shoppers more flexibility than ever over how they buy. While prices, particularly for food, remain low, there were some signs of a shift. Watch the next few months closely.

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Rapid changes in consumer behaviour, intense competition and rising cost pressures mean that more than ever retailers are having to innovate to grow, and in some cases survive. Technology has the potential to fundamentally change retail in the UK in coming years. In particular, many existing jobs are likely to be automated, whilst new technology focussed jobs are created as the industry shifts away from low-skilled, low-paid work and towards fewer, but better jobs.

A look back at long-term investment data shows that retailers have been responding to pressure to innovate for some time: retail businesses have stepped up the pace of their investment in software and hardware for a number of years. By taking a closer look at these figures, we are able to see how recent changes cap a long-term trend towards development and transformation.

Investment is recorded as Gross Fixed Capital Formation by the ONS. In 1997, the earliest year this was recorded, the amount spent by the retail industry on intellectual property products (IPP) was £1.1 billion, 15.4 per cent of total assets. In 2015, the latest available data, IPP, which includes spend on software and research & development, accounted for 31.2 per cent of total assets. While IPP is difficult to measure, due to the complications which result from definition of investments as intellectual property, it does not account for either bricks and mortar or machinery investment. That the proportion of spend on intellectual property products as a percentage of total assets has more than doubled in this period, shows a definite shift in the investment habits of retailers in Britain.

In 1997, the majority of total assets were spent on buildings and transfer costs, and over a third on other machinery and equipment. Only around 2 per cent of total assets were made up ICT (hardware and telecoms), alongside the 15.4 per cent by IPP (Software and R&D). Fast forward almost twenty years, and the picture alters dramatically. By 2015, the IPP proportion of total assets had doubled to account for over 30 per cent, and the share taken by ICT quadrupled. Against this, buildings and transfer costs had dropped from over a half of total assets to a third, while other machinery and equipment had fallen from 36 per cent of the whole to 29 per cent. To put it bluntly, new technology appears to be overtaking bricks and mortar and heavy stock in its importance to retail businesses.

Source: ONS GFCF-Industry by asset

Source: ONS GFCF-Industry by asset

Using 1997 as an index year, the figure spent on IPP has also increased significantly -the amount spent in 2015 had increased by a factor 2.68 on 1997. The increase in ICT spend has been even stronger, from 1997 rising by almost a factor of five. In comparison, other machinery and equipment and buildings and transfer costs have seen very little increase in spend. As we grew into the 21st century retailers focused much more of their spending on intellectual property products, and ICT, than machinery or buildings.

14%

2%

33%

51%

IPP ICT Other machinery and equipment Buildings and transfer costs

31%

8%

29%

33%

IPP ICT Other machinery and equipment Buildings and transfer costs

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Source: ONS GFCF-Industry by asset

When did this change occur? Rather than a steady upward increase, there have been particular periods of growth which have shifted the numbers up. From 2000 investment in ICT increased fairly steadily, barring a period of decline 2009-2012. ICT began to drop from 2009 onwards as the crisis kicked in, before recovering in 2012 as confidence in a sustained recovery returned.

The investment in IPP is overall much steadier, with a relatively uniform increase 2000-2010, and faster growth in the period 2010-2014. Within the IPP category, the vast majority each year is spent on software. While the proportion of the total IPP investment in 1997 spent on software was 88.9 per cent, by 2015 this had increased to 93.3 per cent. Outpacing growth in spend on research & development, with 12.1 per cent of the total IPP spend in 1997, 6.7 per cent in 2015. Software has ruled the roost in terms of spend since 1997, and has only strengthened its hold on budgets.

One might expect such a trend to be mirrored in the spend on hardware. As for software within IPP, hardware makes up for the vast majority of the spend on ICT, standing at 87.2 per cent in 1997, increasing to 94.2 per cent in 2015. Again, this at the expense of the other category within ICT, telecoms, which dropped from 12.8 per cent to 5.8 per cent in the same period.

In terms of amount spent on each of these sub-categories, hardware rose the most by 2015, by a factor of 5.37. Software was the second highest in 2015, attracting a spend 2.8 times higher than in 1997. R&D spend remained fairly consistent, while telecoms, but for its spike in 2006, ended below both software and hardware in 2015.

Source: ONS GFCF-Industry by asset

What this shows is that retailers have steadily been increasing their spend on software and hardware over the past two decades, whilst investment in buildings and machinery has remained consistent.

In coming years we expect the trend in the composition of capital spend, towards IPP and ICT to continue, as the pressures to innovate continue to build.

However, we could see the reduction in total volume of investment seen in 2015 continue in coming years. Margins have been increasingly squeezed by both rising costs and intense competition leaving little cash available for investment. Added to that, the uncertainty surrounding many aspects of our future relationship with the EU is already causing some firms to rethink medium term investment plans as risks weigh on expected returns.

If investment in innovation does fall, it will slow the rate of transformation of retail drag on the productivity growth of both the industry and the UK as whole.

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With the inauguration of President Donald Trump only a day away (at time of writing), anticipation, or even foreboding, over what his presidency may mean for the UK is high. Which of Trump’s election campaign pledges, or even slogans, will be carried through after the 20th January? How much reality will follow the rhetoric? More importantly, of those policies which do draw breath after the inauguration, what effect do they promise for the UK, and its retail industry?

There are a number of ways in which the proposed changes in US policy could impact the UK economy and ultimately the performance of retailers in the UK.

America’s 45th President has indicated he would enact measures equivalent to a fiscal stimulus of $4trn dollars over a ten-year period. If realised, that expansion in government net spending, will translate into an increase in demand for goods, many of which will come from abroad, including from the UK. In 2015 the UK exported nearly $70bn of goods (all sectors) to the UK (£56bn at today’s exchange rates). Based on the proportion of additional spending that could translate into imports and the UK’s share of US imports, the proposed stimulus could add an extra £2bn to the UK’s exports over ten years. Increased exports mean increased earnings and employment for UK businesses.

Given the stated focus of extra spend, particularly on infrastructure (rather than consumption goods), and that relatively speaking the US isn’t the biggest export market for UK retailers, benefits to the industry are likely to come via any knock on impact of a boost to GDP and consumer spending from an increase in exports, rather than through direct channels.

During the presidential campaign, Donald Trump made a number of statements indicating a change in approach to trade. He indicated his desire to increase import tariffs, has made clear that he is no fan of the Transatlantic Trade and Investment Partnership, but has also said that he intends to do a deal with the UK.

What this will mean for the cost of trading with the US in the long term is unclear. Whilst it seems that overall tariffs may go up, the UK could find itself with a lower average tariff rate in the long run.

As noted above, the US is not among the top export or import markets for the UK retail industry. However, there are some businesses who stand to win or lose from any change in our relationship with the US, moreover impacts (positive and negative) will manifest themselves across the supply chain. This is something for retailers to keep an eye on as these impacts will not materialise immediately.

The dollar is likely to appreciate further against the pound and other currencies. Both as a result of increased spending in the US, but also because fiscal expansion is likely to mean the US federal reserve raises its policy rate quicker. Increases in the US fed rate will draw money into the US from around the world pushing up the value of the dollar. That will further raise the cost of goods imported from the US – the pound has lost 17% of its value against the dollar since the 23rd June - but make foreign exports more competitive in the US market and make shopping in the UK a more attractive prospect for US tourists.

However, again, the direct impact on UK retail is likely to be muted given the volumes of trade with the US, with some businesses more exposed to both the short term risks and opportunities than others.

In the short term, it’s unlikely that any of Trump’s initial policies will have a strong direct impact on the UK retail industry; although his actual policies could look quite different to the ones he announced if the election campaign is anything to go by. Retailers should be monitoring the risks and opportunities as the new President’s agenda evolves.

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The turn of year traditionally brings about a “new year, new me” mantra. This normally manifests in various ways, such as an uptake in searches for crash detox diets or a sharp rise in gym website visitations and memberships.

Hitwise data, which aggregates and anonymises online activity from over 3 million people in the UK, has shown a different trend unfolding in recent years.

Whilst there is always a spike in the new year, our data reveals a consistent decline in short-term fixes over the past three years. Instead, we have seen a growing movement in “Clean Living”, a conscious effort by the collective to lead healthier and more sustainable lives.

From a 61% rise in the number of people searching for whole food diets such as veganism, to a 72% increase in people searching for wearable fitness technologies, the Clean Living trend is entering British mainstream culture.

In this article, we examine how people’s choices toward food, fitness and fashion have shifted. As a multi-million-pound industry covering numerous food and non-food product verticals, we also highlight how retailers have evolved to reach this expansive and loyal audience.

The steady rise in interest towards living a more balanced lifestyle is reflected in searches for specific food products. Over the past three years, we have seen a shift away from short-term fixes, such as detox and paleo diets, to a growing adoption of sustainable diets, including veganism, dairy-free and gluten-free diets.

With these searches increasing, the food industry is competing to attract health-conscious consumers

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Supermarkets, in particular, have approached this goal in various ways, from releasing exclusive product ranges, to providing healthy recipes, diet advice and meal plans. The likes of Tesco, Sainsbury’s, Waitrose and Ocado have seen considerable success, with clicks from healthy food-related searches increasing greatly year-on-year.

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The fitness industry has also undergone a transformation, with searches for gyms and exercise rising by over 30% in the past three years.

Fitness is constant evolution to make exercise fun and interesting, from emerging sports (such as Tough Mudder and CrossFit) to fusion art forms (such as piloxing, a merge of pilates and boxing). These sports have helped shift our perception of fitness, from simply a “chore” to get fit to becoming a “way of life”.

A key example of this is the continued rise of yoga, growing by 25% in searches over the past three years. In recent years, we have seen yoga attract a broad following of genders and age groups, due to its diverse offering of mind, body and soul practices.

As the desire to eat healthily and exercise regularly grows, so does the desire to look good whilst doing so. Online visits to sports apparel grew by 22% from 2014 to 2016, largely due to the rising popularity of two key segments: activewear (or athleisure) and fitness wearables.

In only a handful of years, yoga pants have become a fashion statement and lycra has replaced the weekend jeans. Smart and wearable technology and apps have also allowed consumers to increasingly take control over their health, wellbeing and fitness.

One such success story is Britain’s own activewear brand, Sweaty Betty. Over the years, Sweaty Betty has evolved from pure retail into a lifestyle brand, using digital technology such videos, blogs and social media to drive this transformation. For instance, clicks from social to Sweaty Betty’s website was 28% greater than the Sports & Fitness industry average, over the past year.

The key lies in the ability to identify the target audiences and understand what makes them tick. These insights can help shape a range of sales and marketing initiatives, in order to capture and retain this growing segment in the UK.

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Q4 was the final chapter in what has been a seminal year economically and politically for the UK. Alongside these changes have been noticeable shifts in consumer behaviour that have inevitably impacted on activity in bricks and mortar destinations. An overall picture of 2016 will be provided in Springboard’s 2016 Annual Review, however, in the meantime, a review of the fourth quarter of the year provides a helpful first insight.

Footfall across the UK dropped by -0.6% in Q4 this year, a slight deterioration on the -0.4% drop in Q3, but an improvement on the drop of -1.6% in Q4 2015.

Footfall was negative in all three months of the quarter, but much improved from Q4 2015 in both November and December - the months which generate the greatest volumes of footfall. December was particularly favourable, with an upward movement of 2% from -2.2% in December 2015.

High street footfall was flat in Q4 compared with a small rise of +0.2% in Q3, however, this is still a much improved result from the drop of -2.9% in Q4 2015. The opposite trend occurred in retail parks, where footfall moved from +2.3% in Q4 2015 to +0.1% in Q4 2016. The footfall performance in shopping centres also worsened, and from a much lower base of -2% in Q4 2015 declining further to -2.3% in Q4 of this year.

The pattern of customer activity in high streets in Q4 varied from both Q3 and from Q4 last year. In Q3 footfall rose in the first two months of the quarter, but declined in the third, and in Q4 2015 not only did footfall decline in each month but the most significant drop occurred in December. In Q4 2016, whilst November did not perform as well as October the drop from -0.4% to -0.7% was marginal, whilst in December footfall rose significantly from -4% in Q4 2015 to +0.8% in Q4 2016.

Shopping Centre footfall moved downward in Q4 from both Q4 2015 and from Q3 2016. However, all of this deterioration emanated from a further drop of -0.5% in October (from -1.3% in October 2015 to -1.8% in October 2016). In contrast, footfall in November moved upward by 0.5%, from -2.8% to -2.3% and in December footfall improved marginally by 0.1% to -1.9%.

The levelling off of footfall in retail parks - evident in Q3 - continued in Q4 with a modest increase of +0.1% compared with a rise of +2.3% in Q4 2015. Footfall rose by +1.1% in October but dropped marginally in both November and December. The pattern of footfall across the three months in Q4 2016 followed the same pattern as in Q4 2015 when footfall rose more in October 2015 than in November and December.

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Footfall declined in six of the ten geographic areas of the UK in Q4, although the decreases were modest with decreases greater than -1% in only two areas. The most significant decline occurred in Wales where footfall dropped from +2.9% in Q3 to -1.6% in Q4. However, there have been shifts in a positive direction since Q3 - in the East and Scotland – with the largest upward shift in the West Midlands from -5.5% in Q3 to -2% in Q4.

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We’re now well into the Christmas trading reporting season. We’ve had the BRC data to indicate the total sector trends and with the flood of statements on Thursday 12th January, enough of the major players to get a better sense, in more detail, of what is happening by sector.

Mintel will publish a more detailed analysis in its Christmas shopping habits report which is due to be completed in early February. That will also contain consumer research to get a better sense of how consumers were behaving and what they are likely to do next year.

For us there are two big themes behind the figures announced so far.

1. Macro-economic – demand has held up well

2. Retail specific – retailers who have tried to cut back on discounting have been rewarded with stronger sales growth

It may seem churlish to pass over the amazing figures from some of the online retailers or the differences in performance between the key sectors in due course. But for now, we want to concentrate on these two, which we think are also the most important looking forward.

The BRC data showed retail sales up 1.7% in December and like-for-like sales up 1.0%. Food retailers have seen a recovery in sales with final quarter trading up 1.3%.

We had been forecasting sales growth of 2.5% in December as reported by the ONS (and due on Jan 20th). The ONS has tended to come out ahead of the BRC, so our forecast looks as if it is about right. Our expectation was that Christmas would be OK – not outstanding, but not bad either and that has proved to be the case.

After all, the economic background for consumers is still good. Real incomes are rising, the housing market is holding up, interest rates are low and there is deflation in many markets. Consumer confidence has held up and a small dip after the Brexit vote was quickly shrugged off. People should have been feeling well off and they have indeed spent as if they did.

In the following chart of Mintel’s own consumer confidence measure, we ask how people feel about their finances now and how they compare with the same time last year. The sharp upward move in how people feel about their finances now is immediately obvious.

The ONS and BRC figures have been diverging and for most of the year the ONS has been above the BRC. Both agree there has been an upward trend in the second half and both agree that Black Friday was bigger than 2015. It’s the scale that they differ on.

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One important negative for demand in December was always going to be Black Friday – to what extent was it going to take spending power from December. There’s no doubt that it was bigger than in 2015, but the pattern of trading is beginning to shift.

A number of major retailers – notably M&S - decided not to take part. But others did as well – Next, SuperGroup, Fat Face stand out for ignoring it. That suggests that sales over the Black Friday period were even more heavily biased to electricals and large homewares than in previous years. There is evidence in the consumer research in forthcoming Mintel reports, notably Electrical goods retailing - UK, February 2017, that people were buying because they expected prices to rise in the new year.

One of the major themes of the Christmas Shopping habits report of February 2016 was that the emphasis on cutting prices to stimulate sales was undermining customer trust in retail pricing. The response to the statement “Promotions available mean that you don't need to pay full price for gifts” make this immediately obvious.

In effect only 6% actually trust retailer pricing. As we argued at the time, that is an appalling indictment of retailer strategies. Retailers needed to pull back from discounting and re-establish trust in their pricing.

That is what has been happening and the retailers who have been leading that move – notably M&S, but also in a more gradual way, Debenhams – have been rewarded with stronger sales growth over Christmas.

Of course, restoring pricing integrity is only part of the story. The new management team at M&S has been doing much more than just stopping discounting, but the figures for M&S over Christmas were the best to have been reported for over 6 years.

There’s a similar story apparent in food retailing. Tesco, for example, ran a major clubcard promotion last year and still produced excellent results over Christmas 2016. We know that Aldi and Lidl both had an excellent Christmas, and price consistency and great value for money are the basis of their attraction.

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So the underlying theme is that consumers are seeing through marketing. They’ve been losing trust in retailer promotions and they welcome consistency of pricing. They want to trust retailers and they are clearly willing to give retailers the benefit of the doubt. Can it be that we have reached a stage where high profile price cuts are counter-productive? It seems unlikely, but that is the underlying message of some of the results we have seen for the Christmas just gone.

Retailers really are being rewarded for being virtuous.

So we feel that the most important trend of Christmas 2016 was that retailers who have striven to restore trust in the business and their pricing have been rewarded with the strongest sales growth.

There’s no doubt that 2017 is going to be a much tougher year for retailers. Inflation is going to rise and there is some evidence that it has begun to do so already. The major unknown is how real incomes will behave and the extent to which they will be able to compensate for the rise in inflation. One would normally expect real incomes to lag inflation, so some squeeze is almost inevitable. Beyond that there is all the uncertainty that leaving the EU would engender.

It seems to us that the retailers who will be best placed in such circumstances will be those that consumers trust most. Value for money is always absolutely key in retailing and re-establishing trust in their value for money underpins the results of many major retailers over Christmas.

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Consumer confidence indicators have long been used to gauge household spending intentions and retail sales, with the measures pivoting around the general theory that changes in consumer confidence are typically followed by corresponding changes in consumer spending. As Dr Tim Denison, Director of Retail Intelligence at Ipsos Retail Performance, summarised, the theory suggests that: “…if a consumer is more confident about the economic outlook and their personal circumstances, they will be inclined to spend more.”

When the KPMG/Ipsos Retail Think Tank (RTT) met in October, the members agreed that consumer confidence measures do provide key insight into likely patterns of spending. Jonathan De Mello, Head of Retail Consultancy at Harper Dennis Hobbs, highlighted the impact consumer spending has on the economy, whilst James Sawley, Head of Retail & Leisure at HSBC, reinforced this further by flagging that the consumer has been the driving force behind the UK’s recent economic recovery.

However, as the UK assesses the impact of the EU referendum result on the economy, many members of the RTT noted that, more recently, there has been little to no correlation between the indicators and actual retail sales. Martin Newman, CEO of Practicology, highlighted that news headlines such as “Consumer confidence slows as job security fears surface” and “Consumer confidence up in September as shoppers shrug off Brexit fears,” which have been reported within days of each other, seem to call into question the accuracy or interpretation of these measures.

With consumer confidence increasingly in the spotlight, the RTT explored whether it can in fact be accurately measured and whether it in fact acts as a driver to consumer spending.

David McCorquodale, Partner at KPMG, highlighted that “measuring consumer confidence is an attempt to

evaluate consumer mind-set and is not something that can be compared across other measures at an absolute level.” He added that “…what, when, how and in what context you ask [questions] will affect the absolute levels reported.” Martin Hayward, Founder of Hayward Strategy and Futures, also stressed that there is “no such thing as the average shopper”. He noted that: “the unique demography [of shoppers] and the nature of goods sold means that there may be significant variances to the norm that can render the indicator of overall confidence less valid”.

The fundamental flaws of polling were also raised as a shortcoming of consumer confidence surveys. Maureen Hinton at Verdict Retail suggested that: “As we have seen with election polls, it’s hard to get an accurate picture of intended behaviour with surveys, and an isolated score can lead to false assumptions.”

As a result, a number of the RTT noted that individual scores are far less relevant and, as Maureen Hinton highlighted, “a time series [which] does supply a trend…[and] can used to measure the direction of confidence and the impact it will have on spending” is far more insightful.

Going a step further, David McCorquodale provided some suggestions as to how the accuracy of the trend can be improved. He stressed that a representative sample, the frequency of the questioning and clear instruction on where on a scale to answer, all play vital role. If questioning is consistent, sent at the same time every period and weighted to match national representation for age, gender, socio-economic background and other factors, then a more accurate picture could be obtained.

James Knightley, Senior Economist at ING, pointed out that consumer surveys tend to ask questions relating to consumer perceptions after events have already taken place. As such, he stressed that economists consider consumer confidence indices to be ‘lagging indicators’ that in themselves do not provide new information, but rather reaffirm assumptions that have already been made. Dr Tim Denison also questioned “how relevant exactly are reflections of the past on future

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consumption prospects.” He stated that: “…we live in a ‘here and now’ world where 12 months yonder has increasingly less meaning or relevance to the way we live.” This suggests such indices are a helpful summary of the past but less accurate in providing an indication of how consumers might act in the future.

Keeping with the ‘here and now’, many of the RTT members also stressed the power the media has in shaping the outlook of consumers, perhaps skewing the actual levels of confidence consumers feel versus what they act upon. Nick Bubb, Retail Consultant, stated that if you: “ask the typical consumer what the general economic outlook is… they will repeat back what they’ve just heard in the media.” He added that: “what [consumers] say and what they do are very different”.

James Sawley, however, firmly believed that consumer confidence can be accurately measured, with research organisations having honed their methodologies over time to be more accurate. Like many of the RTT members, he pointed to the measure’s long-term positive correlation with retail sales, which – as David McCorquodale and Maureen Hinton suggested – paints a more accurate ‘picture’ of the direction of travel, whilst the individual scores themselves are less reliable and should be interpreted with caution.

Whilst many of the RTT members referred to the long-standing correlation between consumer confidence and spending over time, they also noted divergence between the data sets following shock events. Dr Tim Denison, along with other RTT members, pointed to the months that followed the Brexit vote as a prime example of this. As James Knightley stated: “Consumer and business confidence plunged in the wake of the referendum result, yet the economy performed fairly well”. In fact – as Martin Newman noted – many retailers reported that their sales have not been negatively impacted by the Brexit vote as yet. But why?

As highlighted when exploring the accuracy of consumer confidence measures, Mike Watkins, Head of Retailer and Business Insight at Neilsen UK, suggested that there can be a delay in the effect diminishing consumer confidence has on actual consumer spend. He pointed to research describing “…a six to nine months lag after a change in sentiment to a change in spend.” However local market conditions such as price competition or personal circumstances such as job security can have a bigger impact on how much and when consumers decide to shop. James Knightley

further added that: “Swift government action… can [also] swiftly nullify immediate consumer reactions.”

Maureen Hinton also pointed out that while consumers may come to believe the economy overall is worsening, until it impacts them at an individual level they will continue to spend as normal. As an example, Martin Newman illustrated that for a home owner, rising property prices may lead to a more positive sentiment in general, with their spending positively impacted as a result. However, the opposite is true for someone saving for their first home – if house prices are rising it directly diminishes their disposable income because they would need to save more.

That said, Maureen Hinton also flagged that a continuous stream of bad news is likely to make consumers more cautious, with the result being self-fulfilling. This crucially links back to the issue of media reporting on consumer confidence and indirectly influencing the consumer mind-set when hitting the shops.

Separately, James Sawley highlighted that certain categories of goods are likely to perform better than others in a period of low consumer confidence. Whilst luxury and big-ticket items would likely experience a decline in such an environment, retailers: “…operating as ‘value leaders’ [would be] likely to see an uplift in sales as consumers trade down”. While this might be the case for domestic consumers, James Knightley argued that: “consumer confidence can’t take account of everything to do with consumer spending”, as an example he pointed to the recent boom in tourism as overseas visitors take advantage of the weaker pound. This therefore suggests that indicators should not be used to project consumer trends uniformly.

Finally, David McCorquodale shed more light on what wavering consumer confidence may mean for retailers themselves. He suggested that: “low consumer confidence affects markets as a whole and makes it tougher for specialists to prosper. Generalists win by skimming more markets and persuading those already in store to buy, whereas specialist operating in non-essential categories are easily avoided by cash strapped customers.” To curb diminishing sales, and perhaps even delay or negate the negative impact on consumer spending, he highlighted techniques used by retailers to cement purchase decisions, including free longer guarantees and even celebrity endorsement.

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There was general consensus among the RTT members that consumer confidence indices are never going to tell the whole story. Confidence indicators do provide useful insights that can help reaffirm general assumptions but, as Jonathan De Mello surmised, given the fickle nature of human emotion, consumer confidence cannot be viewed in isolation and needs additional context to make it meaningful.

As raised by many of the RTT members, particular caution should be given to consumer confidence measures following ‘shock events’ such as the Brexit vote. Martin Newman flagged that given the unprecedented nature of EU referendum: “…consumers are likely to rely on gut feel [so, nothing] other than money through the tills and website checkouts [can] accurately measure [consumer spending]”.

The RTT also concluded that consumer confidence indicators and consumer spend are inextricably linked. Maureen Hinton described the spiral in which bad news leads to more cautious consumers and, “as consumer spending is a major contributor to GDP growth, so the economy contracts and consumers begin to see job losses, leading to further cutbacks” and effectively more bad news. This therefore suggests the confidence indicators do drive spending, but confidence is driven by the economy so the cycle becomes self-fulfilling.

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Publication Next Release

BRC Economic Briefing Report 31-Jan

BRC-Nielsen Shop Price Index 01-Feb

BRC-Hitwise Digital Retail Insight 09-Feb

BRC-KPMG UK Retail Sales Monitor 07-Feb

BRC-KPMG Online Retail Sales Monitor 07-Feb

BRC-Springboard Footfall and Vacancy Monitor 13-Feb

SRC-KPMG Scottish Retail Sales Monitor 15-Feb

BRC-Google Online Retail Monitor 03-Feb

BRC Retail Employment Monitor 26-Jan

BRC Quarterly Trend Analysis Report 20-Apr

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Household contribution to real growth (QoQ) 0.5% 0.4% 0.5% N/A

Household contribution to real growth (YoY) 1.7% 1.8% 1.6% N/A

Consumer spending (QoQ, inflation adjusted) 0.7% 0.7% 0.7% N/A

Real disposable income (YoY) 2.8% 1.2% 1.4% 0.4%

Household savings ratio % 5.0 4.4 4.1 3.8

House prices (YoY) 7.0% 6.9% N/A N/A

Gross Mortgage Approvals (YoY) 3.0% 3.2% 3.2% 3.1%

Consumer confidence -1 -3 -8 -7

Climate for Major Purchases 9 14 5 12

Personal Finances in Past 12 Months 2 3 1 6

Personal Finances in Next 12 Months 7 6 2 3

Economy in Past 12 Months -16 -19 -25 -26

Economy in Next 12 Months -9 -17 -22 -23

Total Pay 2.4% 2.5% N/A N/A

Regular Pay 2.4% 2.6% N/A N/A

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GDP (QoQ) 0.3% 0.6% 0.6% N/A

Services Output 0.7% 0.6% 0.8% N/A

Production Output -0.1% 2.1% -0.4% N/A

Agricultural Output -0.1% -1.0% -0.7% N/A

Construction Output 0.8% -0.1% -1.4% N/A

Claimant Count (000’s) 793.4 806.7 809 N/A

Unemployment Rate 4.8 4.8 N/A N/A

Unemployment (000’s) 1604 1616 N/A N/A

Employment Rate (3 months ending) 74.5 74.4 N/A N/A

Employment (3 months ending, 000’s) 31799 31762 N/A N/A

Total hours worked weekly (billions) 1.02 1.01 N/A N/A

CPI 1.0% 0.9% 1.2% N/A

SPI Total -1.8% -1.7% -1.7% -1.4%

SPI Food -1.3% -1.2% -0.8% -0.7%

SPI Non-food -2.1% -2.1% -2.3% -1.9%

PPI – Input 7.5% 12.4% 12.9% N/A

PPI – Output 1.2% 2.1% 2.3% N/A

Brent oil U$/BBL (end of month) 47.6 50.8 47.6 53.2

Official Bank Rate 0.25% 0.25% 0.25% 0.25%

10 Year Gilt Yield (end of month) 0.7 1.3 1.5 1.2

$/£ 1.30 1.22 1.25 1.23

euro/£ 1.15 1.11 1.17 1.16

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ONS RSI VAL NSA (excl auto, % change YOY) 6.0% 6.1% N/A

ONS RSI VOL NSA (excl auto, % change YOY) 7.5% 6.7% N/A

ONS RSI VAL SA (excl auto, % change YOY) 6.2% 5.8% N/A

ONS RSI VOL SA (excl auto, % change YOY) 7.5% 6.6% N/A

Online Retail Sales (RSI) 27.6% 25.3% N/A

BRC-KPMG UK RSM LFL 1.7% 0.6% 1.0%

BRC-KPMG UK RSM Total 2.4% 1.3% 1.7%

BRC-KPMG UK RSM LFL (Food 3m avg) 0.1% 0.0% 1.1%

BRC-KPMG UK RSM LFL (Non-Food 3m avg) 0.6% 1.5% 1.1%

BRC-KPMG UK RSM Total (Food 3m avg) 1.5% 1.5% 2.4%

BRC-KPMG UK RSM Total (Non-Food 3m avg) 0.8% 1.7% 1.3%

BRC-KPMG UK Online RSM (Total) 11.1% 10.9% 7.2%

CBI Distributive Trade Survey - Retail +21 +26 +35

Retail Orders placed with suppliers -3 +6 +12

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Toys & Baby Equipment 1 1 2 2 4

Home Accessories

2 6 1 4 3

Health and Beauty 3 5 8 3 6

Food 4 7 9 5 9

Stationery 5 12 6 9 8

Clothing 6 8 10 7 11

Jewellery & Watches 7 10 4 1 1

House Textiles 8 4 5 6 7

Footwear 9 3 7 8 12

Household Appliances 10 11 11 11 5

Other Non-Food 11 9 12 12 10

Furniture 12 2 3 10 2

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Rachel Lund Head of Retail Insight and Analytics

T 020 7854 8962 E rachel.lund@brc.org.uk

Anoush Darabi Junior Analyst

T 020 7854 8970 E anoush.darabi@brc.org.uk

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articles contain nothing prejudiced to the position or reputation of any party, the BRC shall not be liable for any damages (including without limitation, damage for loss of business or loss of profits) arising in contract, tort or otherwise from its publication or any information contained in it, or from any action

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© British Retail Consortium 2017