Rebalance and resilience

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In 2006, consumers’ place in the economy has changed – from playing the lead they have stepped down to a support role. Dr Tim Denison, Director of Knowledge Management at SPSL, analyses market factors in 2006 and makes predictions for 2007.
Last year turned out to be the start of a rebalance in the drivers of the economy. The consumer finally embarked on the road of transition, from playing the lead to a support role in sustaining the national economy. The move marked the regression of a decade-long retail boom and a return towards shopping sobriety, as evidenced by a fall in footfall of 3.9%.

Economic belt-tightening

After a busier than expected Christmas in 2005, there was a sluggish return to ‘normal’ shopping routines. Retail traffic in non-food stores in January was down by 4.0% year-on-year, setting the mark for 2006.

The downbeat start to 2006 continued into February, when shopper numbers were 4.9% lower than in 2005. The unrelenting rise in the cost of the ‘staples’, increasingly dictated people’s spending priorities.

A late spring, accompanied by a subdued housing market and the general cost of living cosh, discouraged shoppers from getting into their normal DIY spending spree.

With Q1 overall showing a drop in retail footfall of 6.4% against 2005, retail had endured its toughest start in ten years. The economic rebalance away from an unhealthy reliance on consumer spending and towards more revenue generation by business and the financial services was underway.

Consumer prudence remained the name of the game in Q2. More emphasis on saving rather than spending became de rigeur for a growing band of people. On Good Friday, shopper numbers were down 5.5% year-on-year, on Easter Saturday by 4.2% and on Monday by 7.4% – figures that were certainly a disappointment to the home improvement sector.

London’s economy

On a more positive note, the strength of the City in the spring led to an influx in businesses and financiers from overseas. In turn, this stimulated Central London’s economy. There, house prices boomed and retailing benefited. Shopper numbers returned to levels unseen for years; in April the number of people out shopping in the Central Congestion Zone was 14% up year-on-year. London’s resurgence was an early sign of a social split in shopping behaviour, which developed over the course of 2006.

May followed a similar path to April. Neither of the bank holiday weekends improved on the footfall levels of a year earlier. Hindered by the wettest May for 20 years, retail traffic for the month fell by 3.0% year-on-year. However, the number of mortgage approvals rose by almost 8% across the country over April, the highest leap since August 2005. Shopper numbers in the home improvement sector matched those of 2005 for the month for the first time in the year.

The big debate in June was whether the advent of the World Cup would stimulate or suppress shopping. SPSL’s figures showed that the streets were far quieter in the early rounds of the tournament, especially when the England team played Saturday matches.

Supermarkets enter the non-food sector

Overall a fall in footfall of 7.2% against 2005 was recorded in June, showing that non-food retailers generally were penalised. Taken as an industry, retailing continued to account for a diminishing proportion of our disposable income. Yet the impact by mid-2006 was being felt far harder by the non-food sector. The inexorable march of the grocery retailers into the non-food sector continued at a pace. In 2006 it was demonstrably clear that one-stop shopping increasingly suited people’s lives, and through their immense buying powers, supermarkets could be very price competitive. The second cause of the decline in retail traffic in 2006, then, was the growing popularity of supermarkets for non-food goods.

For Q2 the deficit in the number of shoppers had reduced to -4.3% year-on-year. There was some sense that retailing was finding its new state of reality, that the consumer spending supertanker had slowed down.

By mid-2006 the emergent picture was one of resilience and balance, though not necessarily stability. Shoppers, no longer actively avoiding expenditure, seemed to be more accepting of the constraints imposed by high debt levels and ongoing pressures on their disposable incomes. In July, retail footfall levels had strengthened to just 2.5% down year-on-year. With inflation above target, global economies looking healthy, the economy growing at above-trend rate of 0.8%, the manufacturing sector picking up and consumers finding their feet again, it came as no great surprise that the Bank of England elected to put up the interest rate early in August. Any likelihood of finding retail stability in the short term was quashed.

Inequality of wealth

Any change in base rate, however small, affects the portion of society that is highly-geared financially. In 2006 we witnessed the gradual exacerbation of inequality of wealth – the third of the causes behind the fall in footfall in 2006. By the autumn the high street banks were expressing concerns over bad debt levels which were up by 27% in the first six months of the year. Home repossessions reached their highest level since 2001.

For a small, but growing minority debt-servicing was presenting a major challenge. For others though, like the fortunates working in the City, 2006 rewarded them with record bonuses. The end result was a diverging society. In September, the numbers out shopping were down by 3.6% year-on-year, slightly worse than the gap in August.

Shopper numbers stood at their lowest October levels for eight years, down 2.4% on the previous year in a month when the change never usually exceeds one point either way. Mid-season sales failed to inject any telling pace into retail patronage. Raising the national minimum wage also did nothing to help retailers preserve their operating margins. Things got more depressing still in November, when the interest rate was raised to 5%.

Christmas shopping online

Talk of the pending Christmas being the worst in 25 years hit the headlines.

True, the campaign got off to a very slow start. Nowadays, many people simply don’t have the luxury of time, and prefer to let their fingers do the intelligence gathering on the keyboard. Internet shopping is the last of the four main influential factors affecting the number of store visits in 2006.

Despite the publicity it receives and its dramatic rate of growth, sales via websites were still relatively low in 2006 – estimated at between 3-5% of retail sales. Its principal impact in 2006 was on shopping behaviour and an increasing popularity of research online.

Christmas 2006 was certainly a time during in which consumers left their shopping later again, but it was also the case that they were highly discretionary in their buying. Items considered bargains flew off the shelves, but the overpriced undesirables remained unsold. Retail traffic in December was down by 2.3% against 2005.

Things to come

There is a sense of a new equilibrium being struck between retailers and consumers. Retailers with a strong affinity to their customers’ tastes, needs and lifestyle pressures will continue to attract brisk business in 2007. As in 2006 though, the consumer economy remains fragile and this should not be underestimated. At the start of 2007 there are many imponderables hanging in the air over interest rates, inflation, wage settlements, job security, the housing market, to name but a few. Just a minor change to conditions would change the whole complexion of the scene, making the tipping point into a state of retail turmoil never very far away.

About SPSL

Established in 1989, retail research group SPSL is the largest European provider of proprietary tools for high accuracy customer traffic and behavioural analysis deployed by retailers.

The company monitors more than 520 million visits to over 3,100 retail premises per annum in the UK alone.

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