Proof positive of sales boost

Shoppers may be returning to the high street, but consumer confidence levels continue to fluctuate and price promotions remain a key driver of sales, according to the latest findings

Last year was a difficult time for retailers and manufacturers, with many companies posting profit warnings or declining year-on-year sales. While the high street fought hard to sustain sales, it was value retailers such as Primark and New Look that benefited from the cooling marketing, with both showing strong year-on-year sales increases.

To provide a measure of consumer’s views on the economy and their likelihood of spending on the high street, TNS and Nationwide Building Society have developed the Nationwide Consumer Confidence Index. It aims to be an independent barometer of consumer views about the economic and employment situation at the time of interview and expectations for the next six months. The report is released each month prior to the Monetary Policy Committee (MPC) meeting, when interest rates are set, and is a reliable indicator of the official Retail Sales Index.

The index uses 100 as its baseline (or average), which was the level of consumer confidence benchmarked in May 2004 when the index was launched. Figures of 110 reflect a very buoyant consumer outlook, whereas 95 would indicate a very depressed consumer view.

Over the past 12 months, consumer confidence has fluctuated significantly from highs of 110 in February 2005, when confidence was buoyant, followed by sharp falls in May and June 2005, when the Index reached 95. This is some eight points lower than levels of confidence the previous year.

Following last year’s general election, confidence fell as consumers appeared uncertain about the UK economy and their own financial situation. While confidence improved slightly in July and August at the prospect of an interest rate cut, the base rate cut in August had no long-term effect on consumers. Confidence weakened significantly in September and then fell to a low of 92 in October, the lowest level recorded on the Index. These falls were driven by a series of unsettling news, including two US hurricanes, which raised concerns about petrol prices.

Towards the end of the year, these fears dissolved and consumer expectations of house prices improved. Confidence levels started to stabilise and return to its three-month average, which suggests that the decline since spring 2005 may be bottoming out.

To gain a greater insight into what affects consumers’ feelings about the economic situation, Nationwide and TNS have developed three sub-indices to provide a more detailed view on consumer attitudes. These are the Present Situation Index, which measures the consumers’ view of the current economic and employment situation, the Expectations Index, which measures their view of how it will be in six months, and the Spending Index, which reflects their view of whether this is a good time to make major purchases.

Over the past year, the largest fluctuations in confidence have been seen in the Expectations Index, with a steady rise to 113 achieved in April 2005. This suggests that consumers were feeling increasingly optimistic in the run-up to the general election about the future economic and employment situation. This compares to a figure of 103 over the same period when consumers were asked about their views of the current economic and employment situation, showing that they were feeling more optimistic about the future than the present.

After the general election, there was a sharp fall in confidence about the future performance of the economy – from 109 in May to just 91 in June. Interestingly, the fall in people’s confidence on the current economic and employment situation was much less significant, suggesting a degree of stability in consumers’ views on the immediate economy. Yet, in the following months, consumer confidence in the current and future economic situation continued to fluctuate, reflecting further uncertainty.

While both economic and employment indices have dipped below 100 during the course of the year, the Spending Index has been more buoyant, with consumer confidence well above the baseline of 100 throughout 2005. In 14 of the last 18 months, the Spending Index has forecast what official spending figures will show when released by the Office of National Statistics (EAPS measurement). It suggests that while retailers may have had a tough 2005, consumers have maintained a healthy outlook.

This idea is supported by data from TNS Worldpanel Fashion, which shows that during 2005 the clothing market has remained stable, with sales increasing one per cent year on year and volume sales up by five per cent. It shows that consumers are continuing to be attracted by in-store price incentives and cut-price goods. This was particularly true in the run-up to Christmas, when many retailers embarked on price promotions.

The most recent figures from Nationwide and TNS show that the main Consumer Confidence Index fell by five points in December, suggesting that consumers have concerns about the economy and have put off large-ticket spending to focus on Christmas shopping. Although the retail market has continued to attract shoppers through promotions and price cuts, it remains to be seen whether these need to be sustained in 2006 to maintain sales performance.

With consumers feeling uneasy about the current economy, it will be interesting to see how confidence changes in the coming months and what impact this has on the MPC’s decisions on interest rates in 2006.


    Leave a comment