Saturday Essay: Pessimistic consumers will keep trade slow

Last year was another challenging one for the consumer. Rising unemployment, tax increases and high inflation squeezed disposable income. To try to understand how consumers are responding to this, Deloitte conducted the first in a series of reports that will provide an insight into the latest consumer trends, as well as seek to understand more about consumer spending habits.

The findings in the first Consumer Review were stark. One in five households has seen a reduction in income in the last quarter alone, while 7% of households have experienced someone losing employment. Fifty-three per cent of consumers feel pessimistic about their disposable income, 28% were negative about their personal debt and 23% about job security.

Consumers are responding by aggressively cutting back across the majority of discretionary categories. Forty-one per cent are spending less on entertainment, 36% are spending less on clothing and 28% are cutting back on holidays. About 17% of consumers say they are making fewer impulse purchases and one in four respondents say they are spending more time at home.

Partly as a result of this last point, food retailers and consumer packaged goods manufacturers were relatively sheltered last year. More than 40% of people are spending more on groceries than they were three months ago and while this is largely driven by inflation, a significant minority of people are spending more because they are cooking at home more. While there has been a drive towards value, we are also seeing some consumers treat themselves with a DVD, a bottle of wine and food from supermarket premium ranges.

One theme that came through strongly in our research is the influence the internet is having over consumer behaviour. To date, this has been more prevalent in other sectors of the consumer economy such as non-food retail, where we estimate about 40% of the value of all transactions are digitally influenced. However, the expectation of the ‘connected consumer’ to interact with retailers and manufacturers is such that we would expect to see an increase in the amount of multichannel activity this year.

While consumer packaged goods manufacturers walk a tightrope between engaging directly with consumers and supporting major customers, there is already increased interaction through social media and we anticipate this will continue with CPG companies interacting more closely with consumers who, in turn, are demanding more involvement in customising experiences and products.

So what does 2012 have in store? Technology and product innovation driven in part by increased collaboration with consumers is a bright spot and a big opportunity for a number of years to come. The bad news is that the immediate future still looks tough. We do not see consumer sentiment changing radically and our research indicates that consumers will continue to cut back in the first quarter of 2012.

However, if the Bank of England forecasts prove correct and we see inflation fall below 2% next year, then this might free up a little disposable income. Nevertheless, we expect total household spending to increase only modestly in 2012.