In the wake of the unexpected Brexit vote, the subsequent market reaction, and the historic 9 point drop in consumer confidence that had the industry reeling with uncertainty. Fear and panic had us in their icy grasp, and then, well nothing much really seemed to happen, and business as usual continued across the summer.
At a macro level, the last few months have seen the country focus its attention more on the political rather than the economic fallout of Brexit. A new Prime Minister (generally well received and broadly seen as a stabilising influence), a reshuffling of cabinet, and leadership contests for both Labour and UKIP have served as a great interim distraction from the longer term picture.
In the meantime, after the immediate negative impact, the economy appears to be trundling along quite nicely. The IMF is upping the growth forecast for the year, manufacturing output is up, the sun came out and encouraged shoppers back to the high street, and crucially – consumer confidence has already bounced back to June’s pre-Brexit levels (-1) driven by improved expectations in our personal financial situation, perceptions of the general economic situation and intentions to make major purchases. So it seems the British public, in its usual manner, have at least decided not to worry until there’s something concrete to worry about.
As people know, nothing’s actually happened yet, and whilst the restored confidence of UK consumers is vital to our short term prospects, there remain grave concerns about its fragility and what will happen in the face of noticeable impacts of untangling ourselves from Europe.
Who pays the price of Brexit?
The question of how sensitive the market will be to price increases remains a critical concern for many of our business leaders. Summer results from heavyweights such as Next and John Lewis were not as strong as the market hoped for, and many a retailer has announced its numbers in the context of ‘tough conditions’.
There is no escaping the cost of retailing is increasing; increases in minimum wage, the big upcoming changes to business rates, soon-to-be rising petrol and transportation costs and costs of raw materials also set to increase, it’s inevitable that costs will start to creep up.
However, such is the fear of the response of discount-hungry shoppers to potential inflation – often in times of slump in confidence results in a knotting of the proverbial purse strings for the foreseeable future – that passing these costs on in the form of immediate and recognisably higher prices just does not seem like a good way to start a period of known uncertainty, so its likely margins rather than consumers will be hit in the short term.
However, since ‘Marmite-gate’ brought the issue of the impact on pricing of the weak pound to the public’s attention, there appears to be recognition that prices will inevitably increase at some point. Although consumer confidence overall has bounced back since the Brexit vote, still over 1 in 4 think prices in the next 12 months will rise faster than the 12 months just gone , and in the context of making the question of price elasticity incredibly important in the coming months.
What will be interesting in the next year or so is how retailers engage in the cat and mouse pricing game. Not only do retailers have varying levels of exposure to currency fluctuations – in particular the dollar – impacting the supply chain, but with different policies on hedging currency, the timing of the impact is also likely to differ across the retail world. This means those that have a strong hand at a given moment in time, can afford to keep the market competitive, squeezing the margins of those less fortunate, who have to bide their time to see if the sands shift in their favour. Yet another space to watch in these intriguing times.
We all know that the long term shape of retail is changing, and it seems that the shock Brexit vote and its implications will play an important role in the short term shake up. And just when things will start to settle down, Article 50 will be triggered and the game will begin in earnest.
“British consumers appear to have shrugged off Brexit fears about the economy as wages continue to grow faster than prices, rising employment boosts income, and low interest rates encourage people to spend rather than save as seen by improvements in the Major Purchase Index and low levels in the Savings Index.” Joseph Staton, Head of Market Dynamics at GfK
Where’s the advantage?
In such a period of uncertainty, the savvy always asks themselves, but where is the advantage to be had here?
Away from the pricing question, smarter businesses may look to the much talked about ‘underlying causes’ of voting to leave the European Union as inspiration for their next steps.
If we assume (as we believe we should) that the majority of voters who ticked the ‘leave box’ had fairly open eyes as to the potential impact on the economy, and that they voted for reasons of sovereignty, and concerns around immigration, there may be associated trends that can be successfully tapped into (and I’m not just talking about the recent resurgence of UK symbolism in home furnishing products!).
Indeed GfK’s Consumer Life Trends Study reveals a number of macro trends that Brexit has pushed to the fore, that could represent real opportunities for brands and retailers in the coming months.
Product heritage has been on the consumer agenda for a while, in relation to food at least, but there’s an opportunity for a much wider variety of retailers and goods manufacturers to play up any UK credentials they have. ’Home-grown’, ‘British-made’, ‘Buy-British’ will all appeal to those who voted as way of protecting UK values and industry.
Going further, much has been made of the regional divides and the lost opportunities as London dominates, leaves a large gap for narratives about supporting local business within regions, and/or even supporting certain regions from across the country.
One interesting apparent-paradox unearthed by GfK’s Consumer Life Trends study is that while younger consumers are more outward looking and international in their values orientation, they are also more likely to be interested in locally-made or grown food and drink products than those aged over 50, and, by a larger margin, 35-49 year olds.
The greater desire for local is just one manifestation of under 34’s greater need to know where and how products are made. Apart from the basic safety and security issues, there is a desire for authentic stories and values behind brands, products and services.
While these elements can often be conveyed most compellingly and transparently by local brands, there is an opportunity for all brands to convey a fresh message that resonates with all ages. Meanwhile, retailers that can involve themselves in the local communities and support local business and events will also be able to tap into this.
Whilst the immigration issue is a thorny and difficult one to tackle openly, there is still room for positive discussion around what retailers are doing to recruit and (re)train workers from the local community, regardless of whether this is alongside or to replace existing workers from other cities, regions and countries. Indeed ‘providing good jobs for people’ tops the list of what consumers see as important responsibilities for companies, with nearly half (47%) of UK citizens agreeing.
The role of globalization appears to impact many consumers’ views of the European Union, and in this regard there are sizeable differences by age. As might be expected, younger Brits are considerably more positive towards cultural influences from other countries than their older counterparts, but the enthusiasm of 15-34’s is not universal, with less than 1 in 3 agreeing ‘it’s a good thing the culture of our country will be increasingly influenced by the rest of the world’.
Even for younger consumers, there is a need for global companies to position themselves carefully in a context where globalization is not seen as being wholly a force for good. This does not necessarily mean being insular, however, as there are of course advantages to being a big global company. The critical thing is to demonstrate in a tangible way how companies benefit the consumer’s own country.
Also not to be missed are the large proportion of ‘Remainers’ who still want to embrace new products and experiences from across Europe. Retailers that can offer access to the world’s goods and services despite Brexit may also receive a warm reception from a sizeable section of the UK population.
So it seems Brexit has brought many a longer term consumer trend into focus, which just proves that as always, there’s an opportunity available for those who go looking.
If you’re concerned about your price elasticity, or would like to know more about consumer confidence and longer term macro trends, then please contact your GfK account manager to discuss how we can help.