Retail sales are falling. As many consumers struggle to afford basic products, their spending habits and where they shop are changing. Some retailers are struggling to stay profitable, as sales decline while the costs of goods, energy, transport and staff rise.
The cost of living crisis is shorthand for the rapid escalation in the prices of products and services as wages struggle to keep up. The rate of price growth – known as inflation – is currently outstripping income growth, which has largely stagnated. This means that people’s wages are going down in value in real terms.
Inflation has been rising for several months and has now reached a 40-year high, climbing to 9.4% in the year to June 2022 (see Figure 1). This is due to irregularities and disruptions in demand and supply, and to increasing energy prices. Demand patterns have been inconsistent as the Covid-19 pandemic waxes and wanes, affecting production and distribution, and disrupting global supply chain availability and costs.
In the UK, Brexit has increased costs and difficulties of obtaining labour and of importing and exporting products. It has also had an indirect impact on exchanges rates, with the pound falling against the dollar substantially since 2016. But it is energy prices (mainly internationally priced in dollars) that are driving current inflation. Increasing wholesale gas and electricity prices are feeding into rising domestic and commercial energy bills. The cost of petrol has almost doubled in the UK since May 2020. These issues predate, but have been exacerbated by, the Russian invasion of Ukraine.
Figure 1: Inflation (June 2012 to June 2022)
Source: Office for National Statistics (ONS), 2022
Note: CPIH – consumer price index including owner occupiers’ housing costs; CPI – consumer price index; OOH – owner occupiers’ housing costs
Consumer costs have been rising for some time. Government increases in tax and national insurance, as well as the removal of pandemic-related universal credit and other benefit increases, have exacerbated the escalation. This situation also comes on the back of a decade of austerity and wage restraint for much of the population, which resulted in stagnant incomes and decreased spending power for many. Further, inflation concerns have resulted in the Bank of England raising its base rate from an all-time low of 0.1% (held between March 2020 and December 2021), through five increases to 1.25% in June 2022, impacting the costs of consumer and business borrowing.
How are consumers being affected?
Everyone is hurt by inflation, but the impacts are not felt evenly across society. Low-income consumers are more adversely affected as they spend a larger proportion of their income on food and energy (see Figure 2). The effects of rising energy, housing and transport costs have a differential and significant impact on lower-income consumers, as do food and other consumer goods prices (see Figure 3). There appear to be spatial implications from this, with the Centre for Cities calculating that inflation rates are higher in northern and poorer cities, due to their demographics, infrastructure and economic makeup.
Inflation has resulted in many (but not only) lower-income households cutting spending and/or switching the products they buy, as well as wider use of food banks and greater reliance on debt for regular spending. The problems facing low-income consumers have been highlighted by the food poverty campaigner Jack Monroe, who focuses on both the increasing prices and low availability of products typically consumed.
Figure 2: Inflation rate by income decile
Figure 3: Household spending on food and energy, 2019-2021
Source: House of Commons Library, 2022
These wider impacts on consumers can also be seen through the Growth from Knowledge (GfK) consumer confidence index. The index – which presents changes in sentiment arising from consumers’ views of their finances and the economy now and in the next 12 months – is now at its lowest level since the series began in 1974, with an exceptionally rapid decline in the last year (see Figure 4). It shows that consumers are experiencing their own financial issues but are also concerned about the general economic situation ahead and how this might affect them.
Figure 4: GfK Consumer Confidence Barometer June 2022
Source: GfK, 2022
This has also been identified in the ‘abdrn Financial Fairness Trust/University of Bristol 6th Coronavirus Financial Impact Tracker Survey’ (June 2022), which showed the largest decrease in financial wellbeing since the study began. An additional 1.6 million households are estimated to be in ‘serious difficulties’, as well as an increase in those ‘struggling’. These impacts are focused on lower income households and describe a precarious financial existence, with reductions in retail spending, including on food, one consequence.
Consumer confidence in the UK is thus very low despite measures by the government to moderate the impact of household energy bills from spring 2022. An initial Council Tax Rebate of £150 for households in A-D Council Tax Bands has been followed by a package of UK Government assistance payments, to come in between spring and autumn 2022. This covers 8 million low-income households on benefits (£650 per household), 6 million individuals on disability benefits (£150), 8 million pensioner households (£300) and £400 for all households through an energy bill payment. More might be needed in the autumn as energy prices are now predicted to rise even further.
How is the retail sector affected?
The retail sector is beginning to see the impacts of these trends. Food products such as pasta, bread and crisps have seen large price increases, but consumers report rises across the entire product range. A particular recent example is the price of Lurpak and other spreadable butters, leading to reports of an increase in security tagging of food products. They also report cutting back on food purchases, switching to cheaper brand products, shopping more frequently for less, switching to discounters and managing budgets closely, even at the checkout tills.
In non-food markets, people are also postponing spending on large items, such as household and white goods or cars. For retailers this may lead to unsold stock accumulating in the supply chain, especially where orders were placed a while ago. There is also some evidence that clothing companies are being affected by consumers returning items, even those that have already been worn. The British Retail Consortium sales data for July 2022 showed a third consecutive month of falling sales, even before inflation was accounted for.
This slowdown in spending is picked up in official retail sales figures. There has been a fall in retail sales volumes, mainly resulting from a decline in fuel and non-food store spending, according to ONS data for Great Britain for June 2022 (see Figure 5). Online sales have continued to decline as a proportion of retail sales but remain above pre-pandemic levels. June saw food and drink sales rise due to the Queen’s platinum Jubilee, but the broad trend is for declining food sales.
These figures show a steady downward trend in retail sales volumes since summer 2021. Affordability is increasingly affecting purchasing decisions, leading consumers to buy fewer food and household items. As more consumers report difficulties in paying bills and a lack of financial resilience and savings, income to spend on retail goods (including essentials) is further squeezed.
Figure 5: Retail sales volumes (2019-2022)
Source: ONS, 2022
The location and type of shops that people use may also be changing. With high transport costs (especially petrol), local stores may benefit from consumers avoiding costly travel. In contrast, larger car-dependent stores may see a decline in footfall and spending.
Increasing costs may also affect how much online retailers charge for delivery, potentially hurting online sales (although consumer perceptions of delivery costs versus petrol prices remain uncertain).
Concerns about the cost of living have led to workers demanding wage increases and some industrial action. Retailers have had to offer staff pay increases – often linked to the minimum and/or living wage or levels above these – and have faced other difficulties in the labour market, where retail vacancies remain high, and labour is in short supply.
Retailers are also affected by rising operating costs. Businesses’ energy costs are rising and are not capped (unlike for consumers). Similarly, purchasing and transporting or delivering products to stores or to consumers is becoming more expensive. Retailers are also vulnerable to other government and administrative costs such as rates, rent and various levies, which compound the pressures on retailers’ outgoings, even at a time that sales are falling.
What is the outlook for retailers?
The Bank of England and the UK government argue that the current cost of living issues (and especially inflation) are temporary. They are hopeful that pressures will ease in 2023, and that inflation will return to its 2% target by 2024.
But international geopolitical tensions – from pandemic-hit supply chains (particularly in the supply powerhouse of China where covid continues to impact production and distribution) to the war in Ukraine (which is affecting food, energy and fertiliser supplies) – do not show signs of easing. As a result, the prices of various commodities and products are predicted to remain high. Energy prices, for example, have been pushed up by the war and a lack of storage and do not yet seem to have stabilised. This means price pressure on consumers is set to continue in the short term, at least.
Figure 6: Anderson’s ‘Agflation’ and UK consumer price index (2015 to 2023)
Source: The Andersons Centre, 2022
Note: Andersons’ Agflation index builds on Department for Environment, Food and Rural Affairs price indices for agricultural inputs and weights each input cost (for example, animal feed) by the overall spend by UK farmers. Andersons then provides a more up-to-date estimate of the price index for each input cost category.
Product prices also look set to remain high or even increase. The Anderson ‘Agflation’ index – which looks at the price of inputs to farming – stands at over 30% and points to the difficulties that farmers and other producers are having in controlling costs (see Figure 6). These issues will inevitably have a knock-on effect on the prices of food in the coming year. Climate change, including record heat in continental Europe, is likely to hinder food supply further.
This is leading to tensions between retailers and manufacturers. Whilst there are always tough price negotiations in these relationships, disagreements are becoming more common and extreme., leading for example to a Kraft Heinz/Tesco public disagreement and refusal to supply by Kraft Heinz. Tesco said they would not pass on ‘unjustifiable price increases’ while Kraft Heinz said they would ‘not compromise on quality’. Supply tensions across retail sectors continue to simmer as retailers and manufacturers are squeezed in turn by reducing consuming spending and increasing input prices.
For consumers (especially those with lower incomes), the situation and outlook are particularly worrying. This is driving changes in shopping behaviour, affecting retailer performance. If current trends continue, an increasing share of the population will be affected, leading to more widespread effects on the retail sector.
But there will be some winners as well as losers. Retailers focused on value and low prices, perhaps through their own private retail brands, can benefit from the switching underway. Those with a local presence, allowing consumers to avoid costly travel, will also stand to gain. While many consumers and retailers are finding life very difficult, others are relatively unaffected, and some groups clearly have money to spend. Ultimately, how long the current inflationary surge lasts will affect how well, or badly, different parts of the retail sector perform.
In the short term, it is going to be tough for consumers and retailers. Worries about inflation and impact of price rises across the economy are leading to reduced spending and personal hardship. Retailers are experiencing this slowdown and until inflation falls and/or consumers see increases in their disposable income, spending will continue to struggle impacting retailers in turn.
Where can I find out more?
- The Office for National Statistics (ONS) publishes regular updates on their data series and a range of analyses of the trends and directions. They are adding to their standard data series with a range of experimental data sets.
- The House of Commons Library contains a range of reports and briefing papers on topics mentioned in this article.
- A wide range of academics, consultants, NGOs and other formal bodies and pressure groups report regularly on the economic background and implications of many of the issues discussed here. These include the Office for Budgetary Responsibility (OBR), the Institute for Fiscal Studies (IFS), the Institute for Government, the Resolution Foundation, the Institute for Public Policy Research (IPPR) and the Trussell Trust.
Who are experts on this question?
- Lotanna Emediegwu
- Michael McMahon
- Leigh Sparks