Retail under the new government

Chancellor George Osborne revealed his emergency budget yesterday and included the widely expected increase in VAT to 20% and a raft of other measures to help cut the country’s deficit.

If the government is to achieve the savings it has promised the British public, it has to come from public spending or from the pockets of consumers.

The budget cuts and tax hikes that the government has inevitably had to put into effect will squeeze average household incomes and affect consumer spending habits.

At an event hosted by Verdict Research and The Daily Mail last week, Verdict chief analyst Neil Saunders had some keen thoughts on what the post election retail landscape will hold and what retailers need to do in order to maintain engagement with consumers.

“Retail is on the verge of a fundamental shift,” he says, citing tightened budgets but also changing attitudes as the driving forces behind the change.

Saunders predicts the average household will have to spend more than £2,400 over the next five years which will mean discretionary spending will drop from around 38% to 34%.

He sees the start of a “household recession” but says that while consumers are more constricted by what they have to spend, they will be less gloomy about it, having already learned to adapt their behaviours as a result of the economic recession

Saunders says that retail will be a much slower place than it has been in the past 10 years as we enter a period of considered consumerism and the process of consumption slows down further.

The recession saw consumers spend more time researching purchases that they had previously, which is likely to become heightened.

In the previous three months, the supermarket sector has seen growth slowing significantly. This, according to Saunders is because a period of organic growth is over.

He says: “The only way to grow is to take share from rivals and so retailers really have to understand customers and what makes them change their loyalties.”

It was interesting to hear that during the recession, while sales of pre-made cakes increased around 5% as people looked to treat themselves, sales of ingredients to bake cakes rose more than 10% as people craved the traditional satisfaction of making something and sought to get more from the experience.

As consumers become less focussed on the products they buy and more interested in the satisfaction they derive from consumption, this is where retailers must fight their battles.

Retailers now have to look towards driving satisfaction and building emotional connections with consumers if they are to continue to grow in the coming years.