Sector trends

Retail, leisure and the question of consumer confidence

As the country emerges from the coronavirus pandemic, Richard Lim, author of a recent report commissioned by NatWest and Retail Economics, answers questions about how consumer confidence has evolved in the past 12 months.

Briefly, what has your research focused on, and what does it tell us about consumer confidence?

“Both NatWest and Retail Economics have looked at the impact that the pandemic had on consumer behaviour and consumer confidence, but we also focus on the sharp economic impact on people’s personal finances. From there, we also looked at the follow-on implications for retailers and the leisure industry in terms of their business models and what they need to do to restructure, to ensure that their path is going forward.

“In terms of consumer confidence, the impact on the labour market has been much softer than many expected; more time spent at home means more discretionary spending levels, especially among more affluent households. It is among less affluent households where consumer confidence is being damaged most.”

What is going through the minds of consumers at the moment?

“The initial national lockdown in March 2020 caused a seismic shock to societal norms, uprooting everyday lives in the way people work, socialise, communicate and shop. Our research shows that during this initial lockdown, most consumers anticipated a six-month period of disruption (until around November 2020) before a return to normal. In hindsight, this was a gross underestimate. But as the impact of the pandemic endures, consumers have become more accustomed to living under varying degrees of restrictions and have adapted behaviours accordingly.

“We found a correlation between how long people thought the virus would continue and the amount they have cut back discretionary spending. Almost two in five consumers (38%) think that their lives will return to normal by June 2021, rising to 55% by September 2021 and 65% by December 2021. However, this leaves 35% who believe it will take more than a year for their lives to return to normal, with 16% of those believing things will never return to normal.

We’re seeing a polarisation in the performance and confidence of different households. So the impact on specific businesses, especially those in retail and the leisure industry, will depend on their core customer groups

Richard Lim
CEO, Retail Economics

“Consumers who believe that it will take longer than 12 months for their lives to return to normal are significantly more likely to cut back on discretionary spending in 2021. Younger consumer groups appear more pessimistic about both the duration of the impact of the virus and their propensity to spend. Of course, there are many other factors to consider, such as higher youth unemployment rates, the roll-out of the vaccine and the impact on the wider economy.”

What does this say about trends in the medium to long term?

“Perception about the duration of the pandemic’s impact is also critical because it influences attitudes towards saving. Many households have boosted savings due to cancelled holidays, commuting less, having fewer evenings out, and purchasing fewer products. The Bank of England estimates that households in the UK held on to over £100bn of additional savings heading into 2021. Our analysis shows that more than half of household expenditure has been impacted by the effects of the pandemic. So there is considerable pent-up demand.”

For more on Retail and Leisure Trends for 2021, see below:

Has the virus created new types of consumer and, if so, how?

“There is a significant divergence of households along lines of income. Indeed, for the least affluent households around 40% of spending can be deferred (for example, clothing, recreation and holidays). This proportion rises to approximately 65% for households in the highest 10% of earnings, which equates to around £2,895 per month. Even for the average household, saving equates to £1,266 per month, a significant annual total of around £15,000.

“As a result, we have identified four types of consumer that have emerged during the coronavirus pandemic:

  • Wary reverters, whose spending habits remain largely unaffected, and who will resume habits once the pandemic passes.

  • Undeterred optimists, who have enjoyed a boost in personal finance, can easily shop online and will likely revert to patterns of spending seen before 2020.

  • Cautious modifiers, who have lowered spending during the crisis and are likely to keep doing so after the pandemic.

  • Confident adapters, whose boost in spending and quick adaptation to online shopping will be permanent.”

There has been a lot of speculation that the economic recovery in 2021 will be sharp and spectacular. Do you agree?

“What we predict is quite an uneven recovery throughout retail and leisure. We’re likely to witness a polarisation between those businesses that have really sophisticated online propositions and those that don’t. We’re also seeing a polarisation in the performance and confidence of different households. So the impact on specific businesses, especially those in retail and leisure, will depend on their core customer groups.

“That said, we do think there will be quite a significant recovery this year, which can only be good for retail and leisure businesses in general. The past year has been a real challenge and, while many businesses focused on the future and investing in digitisation, the whole sector will be glad when the pandemic is over.”

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