- New report ‘The Constrained Consumer’ by Webloyalty and Cebr is released today
- The findings examine the pressures faced by the UK retail sector – in 2023 and beyond
- The sector is forecast to stagnate and not hit pre-pandemic levels until post 2027
As the cost of living crisis continues to bite, a new report by shopping rewards experts Webloyalty and economists Cebr has revealed the pressures both the UK retail sector and consumers face in 2023. With retailers tackling weaker margins and cost pressures and price conscious shoppers shifting their shopping habits as saving money becomes more crucial, the UK retail sector is forecast to continue to stagnate. By 2027 the sector is still set to be £18.4 billion (8.9%) smaller than pre pandemic levels and be worth £189 billion.
The Constrained Consumer examines bespoke analysis from 250 senior UK retail decision makers as well as 2000 UK adults. The report found that UK rewards programmes (such as points cards and shopper rewards discounts for example) are playing an increasingly important role in retail activity, influencing an estimated £74.9 billion of spending annually, equivalent to 4.9% of overall consumer expenditure. The biggest driver of this is amongst UK supermarkets, where shoppers contribute £34.1 billion.
Retailers under pressure
Cost pressure is the clear dominating issue impacting retailers in 2023. Competing on price (41%), overhead costs (38%) and supply chain issues including input costs (36%), squeezed margins (26%), and weak consumer demand (26%) are the top five challenges cited by retailers in their outlook for 2023. Cost pressures have been driven by a number of factors, supply chain issues from the post pandemic impact, which have then been exacerbated by Russia’s invasion of Ukraine, which has led to soaring energy costs that then cascaded into rises across other price categories, severely impacting business costs.
The report also reveals the increasingly important role that rewards programmes play from a business perspective in the retail sector. The Constrained Consumer found that almost a third (31.3%) of retailers implement a rewards programme within their business in the UK and an additional fifth (20.5%) have considered implementing one over the past year. Retailers offering a rewards programme are significantly less likely to be concerned by key retail challenges in 2023:
- Competing on price: 37% said this was a concern v 42.9% of retailers who don’t use customer rewards programmes
- Squeezed margins: 18.5% said this was a concern v 29.4% of retailers who don’t use customer rewards programmes
- Weak consumer demand: 16% said this was a concern v 29.9% of retailers who don’t use customer rewards programmes
The report further reveals:
- The most commonly adopted profit margin optimisation strategy used by businesses over the past 12 months has been offering discounts (35.9%), suggesting firms are striving to boost sales volume to counterbalance the impact of lower demand and higher input costs.
- The retail sector is amongst the UK’s weakest when it comes to operating profit margins, with an industrywide figure of just 9.3%. This leaves retailers acutely exposed to wider economic headwinds such as the current cost of living crisis.
Graph one: Main challenges facing retailers in 2023
Source: The Constrained Consumer Report, June 2023
Dominic West, Managing Director, Northern Europe, Webloyalty commented: “Retailers have been hit with a steady stream of cost and supply issues affecting their businesses since the start of the pandemic, and any post-lockdown optimism has now given way to concerns over rising costs, inflation and cost-of-living pressures. As consumer preferences and shopping behaviours continue to undergo significant transformations, understanding the role rewards programmes and incentives can play have become paramount for businesses seeking to gain a competitive edge. With less disposable income to go around, many long-term strategies need some adjusting, not least optimising margins amid reduced consumer spending, as well as looking at more innovative ways to entice customer retention. Price-sensitivity, retention and protecting profitability are clearly key issues that need to be on boardroom agendas in 2023 and beyond.”
Younger shoppers and changing consumer spending habits in 2023
Against the backdrop of rising costs and squeezed margins, retailers are also adapting to the evolving consumer spending habits, as embattled shoppers look to save money and shop smarter. Shopper say they are comparing the prices of different retailers more often (62%). Shoppers aged 18 to 34 are also more likely to state that they are shopping for more second-hand goods, 46.8% said this is the case, compared to 32.9% of all UK adults. Younger people are also more likely to make better use of online resources, such as price comparison sites, with 60.7% reporting this behavioural change, compared to just 48.1% of the wider sample of all UK adults.
Younger shoppers and changing consumer spending habits in 2023
Against the backdrop of rising costs and squeezed margins, retailers are also adapting to the evolving consumer spending habits, as embattled shoppers look to save money and shop smarter. Shopper say they are comparing the prices of different retailers more often (62%). Shoppers aged 18 to 34 are also more likely to state that they are shopping for more second-hand goods, 46.8% said this is the case, compared to 32.9% of all UK adults. Younger people are also more likely to make better use of online resources, such as price comparison sites, with 60.7% reporting this behavioural change, compared to just 48.1% of the wider sample of all UK adults.
Graph two: Changing retail spending habits – younger UK adults v all UK adults
Source: The Constrained Consumer Report, June 2023
Cost of living and long term changes
More widely, the report found that the cost of living crisis has specifically created behavioural changes that maybe here to stay for the long term. Consumers have faced an environment of elevated price growth for over twelve months, this has put downward pressure on living standards and encouraged several behavioural shifts. The report found that more than half (58%) of the adult population have changed their shopping behaviour as a direct result of the cost-of-living crisis. Amongst those who stated that the cost-of-living crisis had directly caused a behavioural shift, the most common response was that they were more likely to seek out the best deals. This was reported by 60.8% of this group. 44% stated that they have become more flexible, shopping across different retailers, 27.1% stated they had made better use of online resources, while 19.5% reported having signed up to rewards programmes or cashback sites more frequently. 17.3% stated that they had become more loyal to brands offering rewards programmes.
Consumers and reward programmes
The use of rewards programmes is widespread, with 84.5% of the population using at least one. Rewards programme users reported an average frequency of use of once every 3.2 days. Amongst retail subsectors, supermarkets saw the most widespread use, with 75.7% of respondents stating that they use a rewards programme, while health and beauty retailers saw a 47.2% share.
Six in ten consumers believe rewards programmes are relevant to their retail shopping experience. Consumers that use rewards programmes are more likely to state they are now more actively looking for better deals online, seeing a 62.4% share compared to 34.6% of non-rewards users.
Dominic West added: “More than ever, shoppers are looking for ways to make budgets go further, and the cost of living crisis has forced almost everyone to look at how they are spending and saving money, and how changes can be made. At the moment, mindful spending is here to stay, and this will impact how people continue to shop and of course this understandably will lead to behavioural changes that stay with us and become imbedded. Shoppers that use rewards programmes are miles ahead in seeking out the best deals online and ultimately saving money on their purchases.”
Sam Miley, Senior Economist at Centre for Economics and Business Research said:
“The cost-of-living crisis has had a marked impact on consumer behaviour, which in turn is affecting the health of the retail sector. In addition to weaker demand, retailers are also facing pressure from the supply side, with elevated overheads and logistics issues adding to costs. Collectively, these factors are squeezing businesses in a sector already facing some of the tightest margins across the economy. With competing on price becoming more difficult, retailers are being driven to alternatives to attract and retain customers.
The sector faces a weak outlook for the rest of the year and beyond. Growth is expected to be slow over the medium term, with output set to remain firmly below pre-pandemic levels well into the 2020s.”
