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  • Consumer confidence indices never tell the whole story, but they do provide insight into shoppers’ mind-set, particularly when viewed as a trend over time
  • There is a strong correlation between consumer confidence and consumer spending, however shock events like the Brexit vote can result in divergence between the two data sets
  • Consumer confidence indices should be used in conjunction with other measures to get the most useful and accurate insight

November 2016

Introduction

Consumer confidence indicators have long been used to gauge household spending intentions and retail sales, with the measures pivoting around the general theory that changes in consumer confidence are typically followed by corresponding changes in consumer spending. As Dr Tim Denison, Director of Retail Intelligence at Ipsos Retail Performance, summarised, the theory suggests that: “…if a consumer is more confident about the economic outlook and their personal circumstances, they will be inclined to spend more.”

When the KPMG/Ipsos Retail Think Tank (RTT) met in October, the members agreed that consumer confidence measures do provide key insight into likely patterns of spending. Jonathan De Mello, Head of Retail Consultancy at Harper Dennis Hobbs, highlighted the impact consumer spending has on the economy, whilst James Sawley, Head of Retail & Leisure at HSBC, reinforced this further by flagging that the consumer has been the driving force behind the UK’s recent economic recovery.

However, as the UK assesses the impact of the EU referendum result on the economy, many members of the RTT noted that, more recently, there has been little to no correlation between the indicators and actual retail sales. Martin Newman, CEO of Practicology, highlighted that news headlines such as “Consumer confidence slows as job security fears surface” and “Consumer confidence up in September as shoppers shrug off Brexit fears,” which have been reported within days of each other, seem to call into question the accuracy or interpretation of these measures.

With consumer confidence increasingly in the spotlight, the RTT explored whether it can in fact be accurately measured and whether it in fact acts as a driver to consumer spending.

 

Can it be accurately measured?

David McCorquodale, Partner at KPMG, highlighted that “measuring consumer confidence is an attempt to evaluate consumer mind-set and is not something that can be compared across other measures at an absolute level.” He added that “…what, when, how and in what context you ask [questions] will affect the absolute levels reported.” Martin Hayward, Founder of Hayward Strategy and Futures, also stressed that there is “no such thing as the average shopper”. He noted that: “the unique demography [of shoppers] and the nature of goods sold means that there may be significant variances to the norm that can render the indicator of overall confidence less valid”.

The fundamental flaws of polling were also raised as a shortcoming of consumer confidence surveys. Maureen Hinton at Verdict Retail suggested that: “As we have seen with election polls, it’s hard to get an accurate picture of intended behaviour with surveys, and an isolated score can lead to false assumptions.”

As a result, a number of the RTT noted that individual scores are far less relevant and, as Maureen Hinton highlighted, “a time series [which] does supply a trend…[and] can used to measure the direction of confidence and the impact it will have on spending” is far more insightful.

Going a step further, David McCorquodale provided some suggestions as to how the accuracy of the trend can be improved. He stressed that a representative sample, the frequency of the questioning and clear instruction on where on a scale to answer, all play vital role. If questioning is consistent, sent at the same time every period and weighted to match national representation for age, gender, socio-economic background and other factors, then a more accurate picture could be obtained.

James Knightley, Senior Economist at ING, pointed out that consumer surveys tend to ask questions relating to consumer perceptions after events have already taken place. As such, he stressed that economists consider consumer confidence indices to be ‘lagging indicators’ that in themselves do not provide new information, but rather reaffirm assumptions that have already been made. Dr Tim Denison also questioned “how relevant exactly are reflections of the past on future consumption prospects.” He stated that: “…we live in a ‘here and now’ world where 12 months yonder has increasingly less meaning or relevance to the way we live.” This suggests such indices are a helpful summary of the past but less accurate in providing an indication of how consumers might act in the future.

Keeping with the ‘here and now’, many of the RTT members also stressed the power the media has in shaping the outlook of consumers, perhaps skewing the actual levels of confidence consumers feel versus what they act upon. Nick Bubb, Retail Consultant, stated that if you: “ask the typical consumer what the general economic outlook is… they will repeat back what they’ve just heard in the media.” He added that: “what [consumers] say and what they do are very different”.

James Sawley, however, firmly believed that consumer confidence can be accurately measured, with research organisations having honed their methodologies over time to be more accurate. Like many of the RTT members, he pointed to the measure’s long-term positive correlation with retail sales, which – as David McCorquodale and Maureen Hinton suggested – paints a more accurate ‘picture’ of the direction of travel, whilst the individual scores themselves are less reliable and should be interpreted with caution.

 

Does it drive consumer spending?

Whilst many of the RTT members referred to the long-standing correlation between consumer confidence and spending over time, they also noted divergence between the data sets following shock events.  Dr Tim Denison, along with other RTT members, pointed to the months that followed the Brexit vote as a prime example of this. As James Knightley stated: “Consumer and business confidence plunged in the wake of the referendum result, yet the economy performed fairly well”. In fact – as Martin Newman noted – many retailers reported that their sales have not been negatively impacted by the Brexit vote as yet. But why?

As highlighted when exploring the accuracy of consumer confidence measures, Mike Watkins, Head of Retailer and Business Insight at Neilsen UK, suggested that there can be a delay in the effect diminishing consumer confidence has on actual consumer spend. He pointed to research describing “…a six to nine months lag after a change in sentiment to a change in spend.” However local market conditions such as price competition or personal circumstances such as job security can have a bigger impact on how much and when consumers decide to shop. James Knightley further added that: “Swift government action… can [also] swiftly nullify immediate consumer reactions.”

Maureen Hinton also pointed out that while consumers may come to believe the economy overall is worsening, until it impacts them at an individual level they will continue to spend as normal. As an example, Martin Newman illustrated that for a home owner, rising property prices may lead to a more positive sentiment in general, with their spending positively impacted as a result. However, the opposite is true for someone saving for their first home – if house prices are rising it directly diminishes their disposable income because they would need to save more.

That said, Maureen Hinton also flagged that a continuous stream of bad news is likely to make consumers more cautious, with the result being self-fulfilling. This crucially links back to the issue of media reporting on consumer confidence and indirectly influencing the consumer mind-set when hitting the shops.

Separately, James Sawley highlighted that certain categories of goods are likely to perform better than others in a period of low consumer confidence. Whilst luxury and big-ticket items would likely experience a decline in such an environment, retailers: “…operating as ‘value leaders’ [would be] likely to see an uplift in sales as consumers trade down”. While this might be the case for domestic consumers, James Knightley argued that: “consumer confidence can’t take account of everything to do with consumer spending”, as an example he pointed to the recent boom in tourism as overseas visitors take advantage of the weaker pound. This therefore suggests that indicators should not be used to project consumer trends uniformly.

Finally, David McCorquodale shed more light on what wavering consumer confidence may mean for retailers themselves. He suggested that: “low consumer confidence affects markets as a whole and makes it tougher for specialists to prosper. Generalists win by skimming more markets and persuading those already in store to buy, whereas specialist operating in non-essential categories are easily avoided by cash strapped customers.” To curb diminishing sales, and perhaps even delay or negate the negative impact on consumer spending, he highlighted techniques used by retailers to cement purchase decisions, including free longer guarantees and even celebrity endorsement.

 

Conclusion:

There was general consensus among the RTT members that consumer confidence indices are never going to tell the whole story. Confidence indicators do provide useful insights that can help reaffirm general assumptions but, as Jonathan De Mello surmised, given the fickle nature of human emotion, consumer confidence cannot be viewed in isolation and needs additional context to make it meaningful.

As raised by many of the RTT members, particular caution should be given to consumer confidence measures following ‘shock events’ such as the Brexit vote. Martin Newman flagged that given the unprecedented nature of EU referendum: “…consumers are likely to rely on gut feel [so, nothing] other than money through the tills and website checkouts [can] accurately measure [consumer spending]”.

The RTT also concluded that consumer confidence indicators and consumer spend are inextricably linked. Maureen Hinton described the spiral in which bad news leads to more cautious consumers and, “as consumer spending is a major contributor to GDP growth, so the economy contracts and consumers begin to see job losses, leading to further cutbacks” and effectively more bad news. This therefore suggests the confidence indicators do drive spending, but confidence is driven by the economy so the cycle becomes self-fulfilling.

 

Part II: In detail – Individual views of the KPMG/Ipsos Retail Think Tank members 

James Knightley, Senior UK Economist, ING

Confidence surveys tend to ask questions about incomes, employment prospects and inflation so responses typically reflect consumer perceptions of events that have already happened. This means that economists consider consumer confidence indices to be “lagging indicators”. It is not a piece of information that will provide something “new” that will lead us to significantly change a view on the outlook for the economy.

This is not to say they aren’t useful. They can help to determine whether assumptions we make are fair since over time consumer confidence surveys tend to have a have a reasonable correlation with consumer spending. It can also give us greater conviction that we are likely to see a pick-up (or a fall) in credit demand, increased demand for housing, which could boost construction and whether we are likely to see improving tax revenues from rising VAT receipts.

On the other hand, confidence surveys, like any form of polling, can send misleading signals. This most typically happens around shock events. For example, in the US there have been instances of sharp falls in consumer confidence yet consumer spending continues apace, such examples include the September 11 terrorist attacks, Hurricanes Rita and Katrina and when we have seen sizeable falls in equity markets. Survey respondents may feel (at that particular time) that their job is at risk or that their incomes and wealth may fall, but until it actually happens they will continue with their daily lives. Swift government action can therefore quickly nullify immediate consumer reactions within surveys.

The UK has experienced something similar with the Brexit vote. Consumer and business confidence plunged in the wake of the referendum result yet the economy has performed fairly well. That is because consumer confidence can’t take account of everything to do with consumer spending – for example the boom in tourism numbers taking advantage of the weak pound.

I therefore take the view that consumer confidence surveys are never going to provide a truly accurate picture of what is going on, but they can provide some useful information. However, it needs to be interpreted with caution and is largely used to confirm assumptions already made. Moreover, it is of little use in determining changes in high frequency transactions, such as food.

 

Dr Tim Denison, Director of Retail Intelligence – Ipsos Retail Performance

Consumer confidence surveys have long been a staple indicator of household spending intentions and retail sales, loved by the media. The theory goes that if a consumer is more confident about the economic outlook and their personal financial circumstances they will be inclined to spend more. And the evidence is compelling. It does show that there is a strong long term association between consumer confidence and retail sales.

On further consideration it begs the question why. Most of the confidence metrics use a basket of questions to derive their headline scores. There is nothing inherently wrong in this. More questionable perhaps is that equal weighting is given to the state of the economy and personal finances over the past 12 months and to the year ahead. How relevant exactly are reflections of the past on future consumption prospects? Furthermore, we live in a ‘here and now’ world where 12 months yonder has increasingly less meaning or relevance to the way we live.

Recent months have shown that consumer confidence and retail sales can have little or no correlation, lagged or otherwise. The collapse of the GfK headline index to -12 in July following the Brexit vote bore no resemblance to the BRC-KPMG Retail Sales Monitor total sales growth of 1.9% or the 0.3% decline in August. Significant “other” events often lead to a breakdown between the two data sets. In fact, studies have shown that one third of the movement in confidence is left unexplained by economic variables and that these non-economic factors don’t impact spending.

So does measuring consumer confidence have a role to play? The argument above is that if we were to build a measure using a cocktail of the broad macroeconomic variables that are collected elsewhere, they would do a better job at predicting future retail sales. The problem, though, is that many of these official statistics are slow to be published, negating their worth as predictive measures. Whilst consumer confidence surveys may have their weaknesses in indicating spending intentions, they are a convenient and popular way of bundling people’s take on an array of general economic factors at the time, which under “situation normal” can provide useful insight. The question left hanging is when can we say when is “situation normal” and when is it not.

 

David McCorquodale, Partner – KPMG

Measuring consumer confidence is an attempt to evaluate consumer mind-set and is not something that can be compared across other measures at an absolute level.  What, when, how and in what context you ask it will all affect absolute levels reported.  The key is a nationally representative sample of consumers with a simple questions asked regularly, combined with clear guidance on how on the scale to answer.  If the question is consistent, sent at the same time every week or month and responses are weighted to match national representation for age, gender, socio-economic and so on, then you can build up a picture.  The score itself doesn’t matter as we are looking at the trend – the extent to which it rises or falls.

This form of survey is used for measuring macro confidence – my belief that I can plan for the future without any concerns that things may become uncomfortable – and is more dependent on the overall economic environment.  It can suffer significant short term swings caused by external factors, e.g. the vote on Brexit or even the performance of a national sports team.  But over a longer period of time, it is a useful indicator.

In retail, margin tends to rise with confidence as much as the sales line as the retailer has to try less hard to move merchandise. With this, headline deals need to remain sharp to support the value proposition, but the inclination to trade up is much greater in positive times.

Low consumer confidence affects the market as a whole and makes it tougher for specialists to prosper.  Generalists win by skimming more markets and persuading those already in store to buy, whereas specialists operating in non-essential categories are easily avoided by cash strapped customers.  Techniques to insure against ‘buyer’s remorse’ – e.g. Argos’ 16 day money back guarantee, free longer guarantees, celebrity endorsement – all help to cement the purchase decision by creating a set of attributes that feed the consumer narrative (i.e. what we tell ourselves as shoppers to justify our purchase – often played back to friends and family).

There is also micro confidence to consider – my belief that this brand will deliver on what I need and will be there tomorrow, and treat me fairly should things go wrong.  Specific retailers will deliver consumer confidence, broadly irrelevant to the above factors, through being a trusted brand.

Today, many retailers are talking about the shift towards experience and away from product ownership. Therefore an increase in confidence does not necessarily translate into higher spend in stores but on leisure activities. This is especially acute in apparel.

Consumer spending is more driven by disposable income and personal choice than confidence measures.  Retailers have to fight for that share of wallet but can run strategies to benefit from macro confidence as well as micro confidence.

 

Martin Hayward, Founder – Hayward Strategy and Futures

There is no doubt that consumer confidence indices are a useful indicator of overall propensity to spend as has been demonstrated by various analyses conducted by the European Central Bank amongst others. However, as with any summary indicator, they need to be viewed as a contextual indication rather than a specific prediction.

For individual retailers, the unique demography of their shopper base and the nature of the goods sold means that there may be significant variances to the norm that can render the indicator of overall confidence less valid. For instance, and perhaps counter intuitively, retailers with a low income profile may see little disruption to sales at times of low confidence as their shoppers are always living on a tight budget and have little discretionary spend in good times or bad. Conversely, higher income shoppers may be more sensitive to their overall confidence as they have more at risk in the future – the recent stumble in higher end property sales following Brexit may be a good example of this.

As with any form of insight of insight, it’s always worth remembering that there is no such thing as an average shopper. Where possible, it is important to understand the needs, wants and motivations of your own specific customer base to assess how the general economic and confidence indicators are likely to affect your own sales. A good example here might be coffee – a truly discretionary and expensive daily habit that in theory should be one of the first and easiest ways to control spending at times of low confidence. However, throughout the recent years of economic uncertainty, this sector has continued to grow because consumers have come to categorise this spend as an essential rather than a discretionary spend.

Understanding your own customers’ sensitivity to confidence will also help to determine how marketing plans should be developed to preserve loyalty in difficult times. Useful questions for every retailer to consider include:

Do I have enough information about my own customers’ sensitivity to economic confidence?

Can the goods on offer be positioned as essentials rather than luxuries, thereby protecting spend in times of uncertainty?

Can the loyalty program be used to encourage continuity of purchase through swings in confidence?

Do I understand what influences my customers’ confidence – this is particularly important for younger generations where social networks are increasingly more influential than traditional media sources?

 

Maureen Hinton, Verdict Retail

Does it drive consumer spending? We at Verdict have been tracking consumer confidence on a monthly basis since 2012 and what is evident in our survey, as well as others, is that consumers may have little confidence in the future of the economy, and will say they intend to cut back on their spending over the next six months as a result, but they will continue to spend. They may believe the economy is worsening and jobs and incomes will be affected, but until there is a major financial crisis, such as the global banking crash, and they begin to see the impact in their personal lives, or those of friends and family, as happened during the recession, they will carry on as normal.

That said a continuous stream of bad news does mean consumers will start to be more cautious, and then it becomes self-fulfilling, particularly as consumer spending is a major contributor to GDP growth, so the economy contracts and consumers begin to see job losses, leading to further cutbacks.  The so called ‘Project Fear’ of the remain campaign leading up to the EU referendum, that predicted a full blown recession with massive job losses if the UK voted to leave, led to a significant drop in consumer confidence after the referendum, and consumers holding back on committing to big ticket spending.  Yet there was a quick recovery in both confidence and spending when there was no immediate impact on people’s lives and income.  Confidence does drive spending, but confidence is driven by the economy.

Can confidence be accurately measured?  As we have seen with election polls, it is hard to get an accurate picture of intended behaviour with surveys, and an isolated score can lead to false assumptions. However a time series does supply a trend and we can use it to measure the direction of confidence and the impact it will have on spending. But it needs to be set against other factors such as the economy, wages and the labour market to make meaningful assessments.

So in summary – consumer confidence is a driver of spending, but it should be used in tandem with other factors to provide a meaningful picture of future spending trends.

 

Martin Newman, CEO – Practicology

Within three days in the past week, I’ve seen headlines saying “Consumer confidence slows as job security fears surface”, “Consumer confidence up in September as shoppers shrug off Brexit fears” and “Brexit not deterring shoppers but household finances under pressure”.

So it’s clear that measures of consumer confidence can be interpreted in different ways at any point; even if the measurement accurately shows trends in consumer sentiment over time.

On the 28th September, the press reported that the consumer confidence index compiled by YouGov and the Centre for Economics and Business Research had risen by one point in September, compared with August, but was still below pre-Brexit referendum levels. This was attributed specifically to concerns about future job security, rather than other aspects of consumer confidence.

Respondents are asked about their household financial situations, property prices, job security and business activity in the workplace.

And this highlights why it’s hard to tie sentiment about macroeconomic indicators to consumer spending, where decisions are taken at the micro level. The relationship between the two is not always a neat one. For a home owner, property prices rising may lead to more positive sentiment in general and their spending may be positively impacted as a result. For someone saving for their first home the opposite is true, and rising house prices may directly diminish their disposable income as they try to save more.

Looking at social media the day after the Brexit referendum, one could be forgiven for thinking the sky had fallen in. Equities and foreign exchange traders must certainly have thought so. Any measure of sentiment taken that day would surely have been significantly more negative than even a week before.

Yet since then many retailers have reported that their sales have not been negatively impacted by Brexit, and the Office for National Statistics agrees (through the British Retail Consortium disputes this).

To tie consumer sentiment directly to consumer spending assumes that consumers have all the information they need to assess how future macroeconomic conditions will personally impact them, and make rational decisions when they have that information. These are major assumptions.

As no country has ever left the EU, no one really knows how this will play out, and consumers are likely to rely on their gut feel. I’m not sure that anything other than money through the tills and website checkouts accurately measures that.

 

Mike Watkins, Head of Retailer and Business Insight – Nielsen UK

With the UK leaving the European Union now a certainty, retailers are reframing strategies to take into consideration the uncertain macro-economic outlook. Whatever the terms of “exit” finally are and whenever implemented, this will precipitate a change to the business model of retailers.

However, equally `unknown` and a bigger challenge is how to predict the levels of consumer spend over the next 3 years.

One of the indicators is of course consumer confidence. The conventional thinking is that changes in confidence (sentiment) are a proxy to a changes in behaviour (consumer spend). This is not always the case.

Firstly, consumer sentiment is without doubt shaped by what is read, watched or followed in the media and much of this is external to the UK which is why short term trends are volatile. It is always better to look at confidence indicators over a quarter or preferably 6 month period.

Secondly, shaky confidence will be amplified by a weak economy, or as in the UK at the moment when the economic and political elite manage expectations downwards. This generally leads to a more cautious consumer who is less inclined to spend freely.  Again the outcomes can be unpredictable but they are more indicative.

Research across the European CPG market by Nielsen suggests that whilst consumer confidence does indeed pilot demand there is typically a 6 to 9 months lag after a change in sentiment to a change in spend.  However it is local market conditions (such as price competition, retailer disruption, changes in property values) and personal circumstances (such as the job security, disposable income, changes in family and lifestyle) which have a bigger impact on how much and more importantly when, consumers spend.

For example, global consumer confidence has improved in 2016 helped by North America and Asia Pacific being more optimistic regions with LATAM impacted by regional economic crises.

In contrast, Europe still has the most pessimistic consumers despite having some of the largest economies in the world and some of the most affluent consumers (source: Nielsen).

In the  UK, consumer confidence reached a 10 year high at the end of  2015 yet retail spend remains under pressure as consumers spend more on leisure and experience; spending which seems to be less linked to traditional interpretations  of consumer confidence.

What is clear is that when shoppers are uncertain about the economic environment and also their own personal finances, we see more alignment of sentiment with spend.  Having a better understanding of the `why` behind often opaque spending intentions, will help retailers to better predict future levels of consumer spend as the UK begins to uncouple from the European Union.

 

Consumer confidence
Source: Nielsen Growth Reporter / Consumer Confidence / IMF

 

Jonathan De Mello, Head of Retail Consultancy – Harper Dennis Hobbs

Consumer confidence can have a wide impact on the economy – for example low consumer confidence is cited as a primary cause of the 1990-1991 recession. Swings in consumer confidence are now closely monitored by economic forecasters due to the effect that public opinion has on retail sales. Retailers are already under pressure from rising costs; falling demand due to reduced consumer confidence would serve to reduce margins further.

The traditional composite indicator of consumer sentiment, operated by most governments and supra-national organisations, are Consumer Confidence Indicators (CCIs) – which are based on consumers’ opinions of their current economic situation, their plans for major purchases and their own expectations for the immediate future. Other metrics of consumer confidence, such as Ipsos’ Primary Consumer Sentiment Index (PCSI) provides insight into consumer opinion across different countries, standardising survey results and allowing for international consumer confidence comparisons.

Another popular measure of consumer confidence – the GFK Consumer Confidence Index – has risen in August after dropping by its fastest rate in 26 years in July following the Brexit vote. This consumer confidence uptick is principally driven by a combination of historically low interest rates and low unemployment – which the pro-Brexit press have been only too keen to highlight. However, it remains to be seen whether this happy consumer confidence ‘halo’ will last, when Article 50 is actually invoked.

There are flaws however in the quantification of consumer confidence; making it a less reliable mechanism for forecasting retail sales. The general public are often influenced by overly reactive news reports that exaggerate the impact supply-based economic issues (rising oil prices for example) have on the average consumer, causing drastic changes in economic confidence as misconceptions of the influence on their future spending power spread. While this might trigger changes in spending habits in the short term, it may not necessarily impact their actual future spending power – while a survey respondent might claim to be dissatisfied with the state of the economy one day, their actual economic situation may not always reflect this, so it would be useful for a retailer to additionally consider quantitative indicators of economic strength (employment rates, average property prices, interest rates, personal savings rates etc..) alongside qualitative indicators such as CCIs.

From a property perspective, property values and rental levels can have a major impact on consumer confidence – as they act as a direct reflection of consumer demand and actual spending power. For consumers, house prices – and whether they are rising of falling – have a major influence on sense of personal wealth, and consequently propensity to spend rather than save. Reduced spending means falling retail sales which in turn impact owners of commercial property – as retailers seek to increase efficiencies through cost reduction. Seeking rent reductions and modifying rental payment terms – for example from quarterly to monthly – are mechanisms retailers have employed in the past. Where this has not worked, a number of retailers have gone down the CVA route – shedding loss making stores and holding on to the stores they really want to keep.

Keeping consumer sentiment in mind should be considered highly important due to its subsequent impact on spending habits, but measuring this using traditional consumer confidence indices creates issues of translating subjectivity into hard numbers. Due to the fickle nature of human emotion, consumer confidence cannot be viewed in isolation – rather, it should be viewed very much in the context of other, more quantitative, retail performance indicators.

 

Nick Bubb, Retail Consultant

Much has been made of the slump in the Consumer Confidence surveys in July, shortly after the “Brexit vote” and the subsequent recovery in August and September, but this tells us very little about the actual state of consumer sending in the last quarter, let alone the likely outcome for the next quarter.

In the short term, much of discretionary consumer spending is driven by the weather. If it’s seasonally warm, consumers will focus on picnics and barbecues and enjoying the parks and gardens and will not be interested in traipsing in the car to out-of-town stores to buy furnishings and furniture or in buying heavy coats and jackets and outerwear, unless big discounts are on offer.

As it happens, the post-Brexit period coincided with some aggressive sales on the high street in July, as well as a welcome shift to much warmer weather, after a cold spring, so it’s not surprising that prompted consumers to spend a bit, even though the newspapers and TV news reports were warning of troubled times ahead.

And to the extent that “personal finances” were still supported by good jobs growth and wage rises at a time of low price inflation there was some logic in consumers being unphased by all the “gloom and doom” in the media after the Brexit vote.

Ask the typical consumer what the general economic outlook is and they will repeat back what they’ve just heard in the media…and probably be cautious, but what they say and what they do are very different things.

And although widely followed monthly consumer confidence surveys like GFK ask their panel of 2000 consumers (which is not a hugely representative number) other questions, there is considerable doubt about what these mean when interest rates are so low…

Is now a good time for major purchases? Maybe not if the economy is about to go into recession and the housing market is going to crash, but if interest rates are going to stay so low that credit is ultra-cheap then why not buy big ticket goods?

Is now a good time to save, rather than to spend? Well, maybe yes, if unemployment is going to rise and the housing market is going to crash, but what’s the point of saving when there is no interest to be earned?

When interest rates are as abnormally low as they are, the market research companies need to find new tests of consumer confidence.

 

James Sawley, Head of Retail & Leisure, HSBC

From a banker’s perspective, I believe firmly that consumer confidence can be accurately measured.  Organisations such as GfK have honed the methodology since the 1970s and consequently such indices have a positive correlation with retail sales.

Consumer confidence is a key driver of spending propensity and therefore is a fundamental indicator of the current and future prospects of the retail sector. As lenders, we keep a keen eye on this. Whilst consumer confidence is important we do not look at this in isolation when trying to forecast the performance of the sector. Data on employment, wages, inflation, the availability of consumer credit and, of course, house prices, all work in unison to help the credit markets shape‎ lending and risk appetite.

As lenders we are cognisant of the fact that just because consumer confidence might be falling as a result of a multitude of externals factors, this is does not necessarily translate to worsening prospects for the sector in its entirety. In times of deterioration in consumer confidence, certain categories are likely to outperform, such as ‘affordable luxury’ items like cosmetics and eating out, while those operating as ‘value leaders’ are likely to see an uplift in sales as consumers trade down.

The consumer has been the driving force behind the UK’s economic recovery and therefore it is vital we keep the nation’s shoppers upbeat and confident enough to head out and keep the tills ringing by spending their hard earned cash. With interest rates at rock bottom, the lending and investing community awaits possible news from next month’s Autumn Statement to find out if the new government has a different view on the use of fiscal policy to reinvigorate lacklustre retail sales, giving consumers the confidence that they are prepared to act in uncertain economic times.

 

 

Members of the RTT are:

  • Nick Bubb – Retail Consultant
  • Tim Denison – Ipsos Retail Performance
  • Martin Hayward – Hayward Strategy and Futures
  • James Knightley – ING
  • James Sawley – HSBC
  • David McCorquodale – KPMG
  • Maureen Hinton – Verdict Retail
  • Mike Watkins – Nielsen UK
  • Martin Newman – Practicology
  • Jonathan De Mello – Harper Dennis Hobbs

The intellectual property within the RTT is jointly owned by KPMG (www.kpmg.co.uk) and Ipsos Retail Performance.

First mentions of the Retail Think Tank should be as follows: the KPMG/Ipsos Retail Think Tank. The abbreviations Retail Think Tank and RTT are acceptable thereafter.

The RTT was founded by KPMG and Ipsos Retail Performance (formerly Synovate) in February 2006. It now meets quarterly to provide authoritative ‘thought leadership’ on matters affecting the retail industry. All outputs are consensual and arrived at by simple majority vote and moderated discussion. Quotes are individually credited.  The Retail Think Tank has been created because it is widely accepted that there are so many mixed messages from different data sources that it is difficult to establish with any certainty the true health and status of the sector.  The aim of the RTT is to provide the authoritative, credible and most trusted window on what is really happening in retail and to develop thought leadership on the key areas influencing the future of retailing in the UK. Its executive members have been rigorously selected from non-aligned disciplines to highlight issues, propose solutions, learn from the past, signpost the road ahead and put retail into its rightful context within the British social/economic matrix.

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