Expenditure Pattern

There has been a general understanding in recent years that the retail sector has been proportionally losing sales and its share of consumers’ disposable income to the leisure sector. Whether or not this paints an accurate picture of the true state of consumer spend is the topic of the latest KPMG/Ipsos Retail Think Tank (RTT) white paper.

The impact that any change in spend has had on retailers is explored, together with the reality that many retailers find themselves in today, and whether any shift in spend towards leisure operators is a key driver holding back the sector’s current stuttering performance.

Goods v experience data sets

The RTT members acknowledge that there are a range of different data sources available in order to ascertain evidence of a shift in spend away from the retail sector.

Consumer Price Index (CPI) data from the Office of National Statistics (ONS) shows that households are spending less on goods, and more services, but the majority of this spending shift is attributed to property rentals, vehicle leasing and professional services. James Knightley, ING chief international economist delved deeper into consumer spending behaviour: “Back in 1988, goods accounted for 71% of the basket, now it is down to 52%”. James explained that this shift largely reflects the rising proportion of spending on household rentals and ‘miscellaneous services’, which include personal, legal, financial and social services. The index is based on approximately 180,000 price quotations a month for a sample of 800 goods and services, which are reviewed annually to reflect changes in consumers’ spending patterns.

Dr Tim Denison, director of retail intelligence at Ipsos Retail Performance adds weight to the argument saying that whilst there were shifts in spending habits, total retail spend as a whole hadn’t really changed in the last two decades according to official data: “Total consumer expenditure at current prices seasonally adjusted for the period 1998 to 2018 shows very little change in the amount households spend on retail (food and non-food combined). Back in 1998 I calculate it stood at 29.2% and twenty years later it is 30.0%.” This analysis on household final consumer expenditure (HHFCE) data is compiled from the ONS’s Living Costs and Food Survey, drawn from a UK sample of just under 6,000 households annually.

However, RTT members also seek counsel from alternative sources in exploring where the ‘consensus’ that a shift in spend taking place has come from. ONS data suggest the trend towards experiences appears to be marginal, but the reality we find ourselves in today tells a different story. “It’s no secret that the way money is being spent has changed, with people electing to spend increasingly on experiences, and more frequently of late, opting to forego material objects.” said James Sawley, head of retail & leisure at HSBC UK. These comments were backed up by multiple sets of spending data issued by credit card companies. Tim Denison added: “In a 2017 release, Barclaycard declare ‘spending on physical goods continued to slow, with expenditure on household items dropping 1.2% year-on-year.’ It identified that entertainment growth was running at 6.8% year-on-year and pub and restaurant spending was climbing by 13.6% and 11.4% respectively.”

The RTT concluded that there seem to be conflicts in the different data sources, and members questioned whether the conflict in narratives is exacerbated by the way that spending is classified. Paul Martin, UK head of retail at KPMG and co-chair of the RTT, said: “It is clear to say that consumer spend has evolved over the last decades and is becoming increasingly diversified. This is reflected by the plethora of data sources available, which in my opinion at times deliver increasingly conflicting messages, as ultimately the changing consumer landscape means we are not really comparing like-for-like. Retail as a service, retail experience alongside product-centric retailers and of course brands that blur the lines of a traditional offering are all commonplace today. What is pivotal though and the route to success is understanding the size and shape of each consumers wallet and how the spend is being allocated and what factors are driving this spend.”

RTT members also referenced the structural changes in the retail sector, an ever-evolving society and improving technology as key factors that are driving this apparent shift in credit card spending towards experiences and away from retailers.

Different parts of the retail sector are impacted in different ways by this apparent shift. Maureen Hinton, group research director at Global Data, said: “It is non-food that is bearing the brunt of this shift in spending – it is markedly underperforming with just 7% growth over the decade.”

As regards specific categories, James Knightley highlights ‘food, alcohol and tobacco’; ‘audio visual’ and ‘furniture and household equipment’ as showing slight reductions as a percentage of overall spend, whilst surprisingly ‘clothing and footwear’ has seen a marginal increase.

In terms of leisure operators that are benefiting from this shift, those providing ‘transport’, ‘package holidays’ and ‘accommodation services’ are all shown to have seen increases in consumer spend. The RTT adds that there are opportunities within this shift in spend and Maureen Hinton suggests that “retailers have good reason to invest in ways to add entertainment and experience to their propositions and to exploit trends such as travel retail and duty free, just as WH Smith has done at one end of the market and luxury retailers have at the other.”

The shift to online

A number of different structural and societal factors are impacting on the sale of goods, and as such, have contributed heavily to the apparent diversion of consumer spend. Firstly, the RTT comments on the increased popularity of online shopping, which as a service is improving in line with technology at an almost constant rate. This has in no doubt impacted the size of the retailers’ share of the available spend.

“Online shopping is generally bad for existing retailers given the costs of delivery and returns frequently outstripping the benefit of the additional sales,” commented Martin Hayward, founder of Hayward Strategy and Futures.

Much like the rising popularity of travel has opened up retail opportunities at travel hubs, the ever-growing use of the internet has meant retailers are seeing the store as having uses beyond just selling. Retailers are actively looking at ways to enhance their in-store offering, to provide consumers with the experiential shopping experience they believe this generation desires.

Jonathan De Mello, head of retail consultancy at Harper Dennis Hobbs, points out that: “Given the rise of online retailing, the high street is markedly different from what it was 10 years ago, with shoppers increasingly demanding experiences as part of their shopping trip – as a point of difference against online shopping. Not only has this exacerbated the decline of certain centres, which have lost out through retail business failures – or lack of retailer demand – it has also led to an increase in the presence of ‘experience’ stores, where the store is seen as an additional marketing channel.”

However, RTT members do question the actual benefits retailers are reaping by this switch to a more experiential offering, and if investment in this area is actually holding the retail sector back. Nick Bubb, independent retail consultant, argues that consumers might not be buying into this investment: “Department stores in particular have rushed on to the ‘experiences retailing’ bandwagon, in the belief that consumers want more than just the usual products and services, but there is little evidence of these moves having any real impact. The monthly Coffer Peach Tracker survey of pub and restaurant sales shows that this sector is not exactly booming either, notwithstanding continued new restaurant openings.”

Social changes

RTT members concur that, alongside the improving technology, changes within society, and the values consumers hold, contribute to the apparent shift in spend.

Focusing on the millennial market, Martin Newman, The Customer Experience Champion, said: “Success in the millennial’s mind is not about how much money you make, more it’s about how much freedom you have and the experiences you can share. Previous generations didn’t have the opportunity or ability to travel as much as us or to start a new business the way we do today, therefore they invested in homes, cars and other things that were a reflection of the times we lived in”. It is apparent that today’s younger consumers are more environmentally aware and have more of a sharing and recycling mindset in terms of physical goods – they seem less focused, and place less value, on the ownership of possessions.

Martin Hayward adds: “It is likely that younger families will spend more on communications such as telephony and data, and are more likely to stream music, films and other content. These services are not cheap and place pressure on disposable income for shopping. This will particularly impact on fashion retailing.”

This shift in mindset, and the improvements to technology that assist it, are clear when looking at how people spend their money. The RTT highlight in particular the abundance in choice in terms of services now available to consumers, with Maureen Hinton adding: “Life is changing – a decade ago we were not paying subscriptions to Amazon Prime Video and Netflix which currently have around 20 million paying subscribers in the UK.”

Whether or not the different spending habits of the younger consumer audience is driven more by the new products available to them, or because of a wider societal change remains unclear. Dr Tim Denison points out: “Different consumer segments are found to have different spending priorities and it is here that the two conflicting stories (of shrinking versus stable spend on retailing) converge. All the evidence shows, for example, that younger people spend less on ‘things’. Whether this is a long-term change in cohort behaviour, or the consequence of other events, such as more young people staying at parental homes longer and therefore not needing to buy so many goods, is difficult to gauge.”

Whatever the reason for the change in the way young people spend their money, the RTT agree that more of ‘the pie’ is finding its way to the leisure sector, which can provide these consumers with the more experiential, and less tangible, gratification they are after.

There is little doubt that there have been changes in the way that UK shoppers spend their disposable income, moving from the purchasing of ‘things’ towards ‘experiences’ – with the younger millennial market leading the charge in this shift in spend.

Mike Watkins concludes: “So traditional retail, compared to other sectors of consumer spend, faces more headwinds. Sentiment is intrinsically rooted in changing economic circumstances, but spend is now driven by a desire for more consumer experiences. Due to changing priorities and aspirations, or as a result of external factors such as cost of living increases, shoppers are adapting their over wallet allocation for discretionary spend. This is resulting in less money being spent on goods or services which have low involvement or minimal investment.”

The magnitude of this shift however, and the actual impact it is having on retailers is trickier to dissect. The RTT accept that different data sources that track consumer spending reveal conflicting arguments on where shifts in consumer spending are moving. The issue is compounded by the traditional ‘data buckets’ in which we classify spend. Factors such as the rise in internet shopping and increasingly popular subscription services are making it harder to distinguish the actual impact that changing consumer spending habits are having on retailers.

It is clear though that any shift in spend away from retailers, has of course, impacted negatively on the sector. However, the RTT members hold that this alone is not to blame for the fragile position that many operators find themselves in today. External economic factors, political uncertainty, rising costs, a changing consumer mindset, an increased use of technology and the rise of the discounters, alongside this shift in spend towards the leisure sector are all working together to challenge the status quo of what it takes for a retailer to succeed in 2019.