As the ‘cut back economy’ continues, there is worrying evidence from the retail sector that indicates there is more trouble to come.
The recent collapse of the Wilko high street chain has reinforced to many that the pressure on high streets continues. Wilko had remained robust for many years, experiencing growth as others experienced a decline. In 2018 it saw its turnover peak at £1.6 billion but also saw its profitability decline as high street trading suffered immense pressure and out-of-town competition such as B&M and Home Bargains made an impact.
Of course, the COVID-19 pandemic added to the decline and then the last year’s energy price hikes and soaring inflation all affecting the pound in the consumer’s pocket, served to hammer the final nail in the proverbial coffin.
The Cut Back Economy is a term coined by the publication Retail Economics and Grant Thornton collaboration which started in 2022. They surveyed 2000 UK consumers about their spending behaviour, how they were planning to cut back and where.
“The research identifies the opportunities and risks that retail brands need to understand in order to better navigate current industry challenges in order to maintain a competitive advantage in 2023 and beyond.”
Key highlights of the 2023 report (source articles and report cited at the end of this blog) aimed at the retail sector are as follows:
· The report estimates that inflation will erode £65 billion of household income, with the average household £2,300 worse off by the end of this financial year.
· More middle and higher-income households are being drawn into this widening crisis as savings dwindle and mortgage rate rises bite.
· One in three consumers has changed where they shop for regular purchases, switching to cheaper brands or retailers.
· 88% of shoppers plan to cut back their spending to April 2024.
· The failure of wages to keep pace with spiralling costs has cost UK households £50 billion in lost income.
· UK households face an additional £15 billion erosion of disposable income with real earnings not expected to return to growth until May 2024.
· The surge in mortgage interest rates, particularly for middle-income homeowners presents a significant hurdle for young families and those burdened with higher debt levels relative to their income.
The report goes on to urge retail, leisure, and hospitality businesses to develop a deeper understanding of customer journeys, including their ‘cut back intentions’.
88% of shoppers plan to cut back their spending over the 12 months to April 2024. This is just a 2% rise from last year so virtually unchanged.
The report states that the scale of cut-back appears to be intensifying with two-thirds of consumers intending to cut back across most, if not all, areas of spending. This is up from a little over half a year ago.
Four ‘cut back cohorts’ are identified. Since 2022, the Financially Distressed and Squeezed Spenders have increased.
Spending on groceries pets and personal care is resilient, ‘recession proof’. Discretionary categories are challenged, including eating out, takeaways and out-of-home entertainment. Experiences such as holidays trump retail pleasures.
For those retail and hospitality businesses who felt ‘they did really well after covid,’ the cost-of-living concerns have certainly dampened the boost that post-COVID spending provided.
If you’re running one of the businesses in the most affected retail or hospitality sectors, you’re more than likely feeling the pinch. You’re seeing less footfall, the spend per head has declined, luxury goods are proving harder to move, you’re seeing your regular customers less often, your costs are increasing and businesses around you are also struggling. So, what are you going to do?
Even Keel Solutions provides a wealth of advice for both businesses in financial distress and individuals in financial distress in the form of a monthly blog. We’re taking this opportunity to signpost you to the blogs that will be of most help right now, including a short summary of each:
“It's important for small and larger businesses to have a financial contingency plan in place to ensure business continuity. A plan that documents the worst-case ‘what if’ business scenarios. What the impact would be and what you would do about it. The plan should focus on finances and resources.” Read the full blog here which includes how to formulate your Plan B financially speaking and the benefits of having a Plan B.
Whether you own a business or not, it is essential to keep your personal finances on track. This blog gives some tips for getting your personal finances under control and some advice to follow when debt becomes overwhelming.
This blog talks about the support that’s available to businesses who are finding it tough and identifies the 6 signs of a business in distress.
If you’re experiencing financial distress in your business and need some help, please do get in contact with us for a no-cost initial and confidential conversation. Call us on 01202 237337.
We’re an experienced team with strong values. We like to understand your needs and ensure you have the best advice possible. We’re experts in all areas of insolvency; you can read more about us on our website here.
Sources
Retail Economics Survey Report
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