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Retail Think Tank

Cost of Living Crisis – How bad could it get and what impact will it have on the retail sector?

  • The cost of living crisis presents a major challenge to the sector post-COVID-19
  • Retailer’s costs are going up, and this pressure will continue for some time
  • The current situation presents a real opportunity for retailers and the sector to re-structure and become customer-centric businesses
  • Retailers need to be positive and invest in technology, data and their own ESG agendas for the future success of the sector

The last 24 months have been some of the most tumultuous and painful in recent memory for the UK retail sector. And now, just as retailers shake off the shackles of COVID-19 restrictions, they are facing a cost of living crisis that is already putting increasing financial pressure on their customers and their own operations.

At the latest KPMG/Ipsos Retail Think Tank meeting, members discussed the implications of rising prices and the cost of living crisis, and through the lens of the consumer, retailer, suppliers and the ESG agenda, focused on why this is happening, what are the key implications for retailers and how should they mitigate the impact.

Why is this happening?

Despite being bruised by the COVID-19 pandemic, the retail sector delivered a robust performance over the last six months, with the RTT’s Retail Health Index increasing one point to 75 in Q4 2021 and holding firm the following quarter. The sector actually ended the first quarter of 2022 with an equal score to before the pandemic in Q3 2019.

Performance was driven by the non-food sector enjoying stronger than expected demand with many people returning to offices across the UK, shopping for new clothes and seeking out experiential shopping activities. However, RTT members expect this demand to start to fall away as the cost of living crisis beds in and consumers are forced to tighten their belts.

The current economic situation brings with it swathes of challenges that are driving increases in retailer’s cost, but many of these only exaggerate issues that the retail sector was already facing. Geopolitical uncertainty continues to reduce output and increase the cost of goods; supply chains are inefficient and require major restructuring; progressive Environmental, Social & Governance (ESG) agendas need implementing; and investment must be made into new technology to drive efficiency and insights.

As steep rises in energy prices contribute to inflation reaching a 30-year high, domestic economic conditions are putting pressure on households to cut back on discretionary spending. This surge in inflation will probably mean that real household disposable incomes will fall by more in 2022 than in any year since records began in 1955, as Ruth Gregory, Senior UK Economist, at Capital Economics, explains: “It’s undeniably a worrying and troublesome time for UK households, and individuals will suffer the pain of the cost of living crisis, especially those at the lower end of the income distribution. We expect inflation to peak at 10% in October, driven by a 30% rise in utility prices in October on top of the 54% jump earlier this month, an increase in food inflation from 5.9% in March to above 7.0% in the coming months and constraints on the supply capacity of the economy continuing to bite.”  

The UK consumer is set to bear the brunt of the crisis, but while real households’ disposable incomes will continue to fall this year, RTT members do stress that the economy is starting from a strong position in several areas.

Ruth continues: “Strong fundamentals in the labour market will go a little way to dull the effect on the economy as a whole. Low unemployment levels mean that a larger share of the population is receiving an income than at almost any time since 1975, and the demand from businesses for new workers is fuelling faster wage growth. Millions of households have amassed savings throughout the COVID-19 pandemic, and a drop in this saving rate at the start of 2022 shows that households are starting to draw on savings in order to continue spending.

Economic pressure isn’t just impacting consumers. Retailers also started the year facing a rise in their own costs, as Jonathan De Melo, Founder & CEO, JDM Retail Consulting, comments: “Retailer costs have risen significantly due to a combination of wage inflation, increased freight costs, the rising cost of raw materials, and a return to full business rates payments from April. This impact has been felt across all sectors, but the electrical goods sector has been hit particularly hard, mainly due to exorbitant shipping costs coupled with a global microchip shortage. Geopolitical events such as the war in Ukraine and the ongoing lockdowns in China continue to exacerbate the situation, limiting manufacturing and increasing the price of commodities.”

What are the key implications?  

The implications of the current economic conditions on the retail sector are substantial and will require swift action to mitigate the effects. The RTT believes increasing costs, price rises, a battle with other sectors for discretionary spend and changing shopper behaviour are already impacting on the sector.

Nick Bubb, Retailing Consultant, Bubb Retail Consultancy, explains: “The stockmarket looks ahead and it is clear from the recent underperformance of Retailers that investors are discounting a difficult period for Retailing profitability, given the mounting pressures on consumer confidence and on operating costs. The overall stockmarket is broadly flat on a cumulative basis, so far in 2022, but the General Retail sector is one of the worst performers, down over 20% in the year to date, with, for example, the Marks & Spencer share price down by over 40% and even Next down by 27%. The Food Retail sector has held up a bit better, but even that is down by over 16% so far in 2022, with, for example, the share price of Sainsbury (with its heavy Non-Food sales exposure) down by 16%.”

Price rises

The urgency of the economic situation puts emphasis in the short term on reducing costs and driving efficiencies. James Sawley, Head of Retail & Leisure, HSBC, explains: “At present, retailers are feeling inflation more than their customers. The cost of commodities, manufacturing, freight, shipping, and labour are rising faster than consumer prices, and as such most of the pain at the moment is being worn by the retailers.”

Despite a conscious effort from large parts of the retail sector to absorb much of their cost increases, consumers are already feeling the effects of price rises at the tills, with GlobalData’s latest monthly trend tracker showing that 84% of consumers had noticed increases in their grocery bills. As costs continue to mount for retailers, RTT members expect further price rises throughout the year in an effort from retailers to protect margins – this will likely be in conjunction with an effort to reduce product and packaging sizes.

The battle for discretionary spend

RTT members agree that after two years of COVID-19 restrictions and relative isolation, there is a desire from a lot of consumers to ‘go out and spend’. The cost of living crisis may be a dominant force on the news agenda, but high employment, increasing wages and bumper savings amassed over the last two years seem to be giving many people confidence, at least in the immediate term, to keep spending.
James goes on to say: “The challenge for retailers will be battling other sectors for their share of any available disposable income. The leisure and hospitality sectors are increasingly taking spend away from retailers as consumers are prioritising socialising over shopping – especially as the weather takes a turn for the better. There will also be high demand for foreign holidays in the summer as people look to get away with the end of many of the restrictions and testing requirements. Having benefited from a reduced level of spend in those sectors throughout 2020 and 2021, with all COVID-19 restrictions now lifted, the consumer is acting on that pent-up urge to socialise and this is to the detriment of the retail sector.”

Changing consumer behaviour

The cost of living crisis is being felt across all sectors of retail, including in food where the consumers’ changing behaviour is already having a tangible impact on the grocers, as Mike Watkins, Head of Retailer and Business Insight UK, NielsenIQ, discusses: “Consumer behaviour in the grocery sector is already shifting, with the discounters seeing an increase in sales early in 2022, and I expect Aldi and Lidl to soon hit a new high of 20% grocery market share. Alongside volumes of sales falling 7% in March (NielsenIQ Scantrack), shoppers are increasingly opting for private label goods, as a conscious decision to save money on grocery shopping as part of their overall coping strategy when faced with rising household bills”.

It’s clear that the squeeze on disposable income will impact on consumers in different ways depending on where they sit on the income scale, and as such consumer behaviour and spend will differ across retail categories, presenting them with a plethora of challenges.

Maureen Hinton, Global Retail Research Director, GlobalData, adds: “Consumers on lower incomes will be looking for value and cutting back on discretionary spending. This is good for budget retailers and supermarkets, but a cutback in volumes will make it challenging as scale is essential to maintain low prices. At the other end of the scale, those on high incomes will be less affected – though are likely to choose to spend more on travel and holidays. However, an increase in tourism and the access to physical shopping will boost sales for luxury and premium retailers whose customers are less impacted by inflation – though this is a smaller share of the market. It is the mainstream retailers who will have to give consumers a very good reason to spend with them with price being a major factor.”

How do retailers mitigate the impact?

RTT members believe there are several different levers that retailers can pull to mitigate the impact of the current situation, including reducing costs and driving efficiencies, becoming customer-centric businesses, investing in technology and talent acquisition, and a short-term shift in focus regarding ESG agendas and associated messaging to consumers.

Reducing costs

Reducing costs will certainly be at the top of most retailers’ agendas, and the knee jerk reaction of some may be to implement mass job cuts and store closures. While this will offer short term respite, RTT members agree that this is an outdated way of thinking, which will only lead to poorer levels of customer experience and satisfaction, at exactly the time when retailers need to be proactive, focus on the consumer and encourage them to shop.

Martin Newman, The Consumer Champion, comments: “It has never been more important than it is right now, for retailers to focus on building customer lifetime value and turning customers into fans. Lead with purpose and authenticity. Show you care. Show you understand. Walk the talk by reducing prices and find other ways of adding value to customers when many are in such a difficult situation. This will generate goodwill and will be returned by customers through their lifetime value and advocacy for your brand.”

Customer-centric businesses

RTT members agree that retailers need to reassess their own customer base. By taking a closer look at what their customers value, retailers can then start to implement the forward-thinking change that the situation demands.

Paul Martin, UK Head of Retail, KPMG, explains: “Before strategies to cope with, and combat, the cost of living crisis are implemented, retailers have to first reacquaint themselves with the consumer. Retailers have enormous swathes of data on their customers – their buying habits, locations, product preferences, delivery schedules, levels of spend – all of this is crucial information that is at the fingertips of decision-makers. The final piece of the jigsaw is investment to organise and understand this data on a grand scale. Without a clear picture of who they are selling to and what they want, retailers won’t be able to deliver the changes that are required to not only survive, but come out of the cost of living crisis in a stronger position as customer-centric operations.”

Utilising this data will put retailers in a position where they can better create and sell products and goods that are more appealing to consumers. Peter Luff, Managing Director of Ipsos Retail Performance, explains: “Fundamentally, successful retailers sell products that are desirable to the consumer or show value for money. This has always been the recipe for success, but current economic conditions are squeezing people’s disposable spend and intensifying this requirement – increasingly amongst the middle-income earners. Driving quality and affordability into that middle sector will be key for ensuring demand remains robust in the coming 18 months.”

Investment in data and technology

Retailers must embrace the insights that can be gleaned from their customer data, so their decision-making can be dictated by the consumer. This will require investment in new technology and talent to organise and understand the data. In such a competitive employment market, talent acquisition could be expensive and time-consuming, resulting in many retailers looking to outsource the activity to external partners.

This investment in expertise will allow for successful retailers to be able to re-engineer their product lines to be smaller and more focussed on what customers want to buy – this will likely include the sourcing of more goods and products from artisanal and local suppliers. Data-driven decision making will also allow for more sophisticated and agile price and promotional management, something that will be a powerful tool as the cost of living crisis plays out.

The ESG agenda

The wider ESG agendas of retailers will likely take a back seat in the short term, with cost and margin pressures forcing many operators to focus less on environmental and social related topics, only investing time and resources into the must-do governance aspects of ESG. RTT members agree that this course of action could be a mistake and instead, proactive retailers should be remodelling policies to link their ESG agendas with the cost of living crisis.

For example, UK retailers are aware that the re-engineering and optimising of supply chains to source goods more locally is a critical priority. Robust, near-sourced supply chains will help to create operations that are more resilient to external factors such as inflation or fluctuating shipping costs, as well as reducing the environmental impact of international logistics. Retailers should be looking to near-shore sourcing as a cost benefit to themselves, but also to support local communities and help reframe their ESG messaging to the consumer.

Despite what are, in the grand scheme of things, short term challenges, RTT members stress the importance of retailers not losing sight of their longer term ESG goals, which must remain a central focal point for the sector. Both the non-food and grocery sectors require strong leadership to kickstart the debate on reinventing processes and best practice in the sector. Communication with consumers will be vital in this process, as undoubtedly it will lead to increased prices – but operators need to explain why it’s happening and the wider societal and environmental benefits it will bring.

Business leaders have a short window of opportunity to take the lead on issues such as waste, CO2 emissions, home deliveries, water usage and packaging, otherwise their hand will be forced by governments with regulations that will likely prove more costly in the long run.

An opportunity to right-size pricing?

RTT members agree that keeping prices low has to be a top priority, and, at present, many retailers are holding back on passing the bulk of their rising costs onto customers. However, for far too long, there has been a race to the bottom in terms of pricing across the retail sector. In the longer term, RTT members question whether 99p ready-meals and £1 t-shirts are sustainable, and as such, many of the price rises that consumers experience could be permanent.

While there is a ‘window of opportunity’ in the coming 18 months for a wider re-structuring of pricing, Martin Hayward, Founder, Hayward Strategy and Futures, warns that it’s a long process to do this, and retailers will have to tread carefully: “It’s been apparent for a number of years that too much ‘stuff’ is far too cheap, and while a sector-wide recalibration in pricing structure to end the race to the bottom is needed for the good of the sector, society and the environment, now is not the time to start this implementation. Consumers will not be sympathetic to steep rises in prices, and it’s a slow process to unwind the UK’s addiction to fast fashion and cheap food.”


The cost of living crisis has developed just at a time when the UK retail sector had cause for optimism following two years of stop-start lockdowns. It’s clear that the sector will not go unscathed, with rising costs expected to cause further retail failures in the coming months. However, most operators showed their mettle during the pandemic, adapting to rapidly changing trading restrictions and shopper behaviour, and RTT members believe the cost of living crisis is another challenge that the UK retail sector can meet head on.

The retail sector requires strong data-led leadership at this time, and whilst there will be pressure to cut costs through redundancies and store closures, the RTT believe that the retail sector should instead look towards a more positive set of solutions. Investment in technology, improving operational efficiencies and creating more robust supply chains will help ease the current pressure and put the sector in a stronger position – so much so that the cost of living crisis may actually ignite the structural change that the sector has long required.

With increasing costs and falling consumer confidence, RTT members predict that the next quarter will deliver the first negative Retail Health Index result since Q2 2020 at the start of the pandemic. The increased costs that retailers are facing are also expected to be a more permanent fixture, meaning margins will continue to come under pressure and price rises will have to be passed onto the consumer

As such, retailers will have to innovate and work hard to create and sell consumer-centric products, and they will need to be desirable to shoppers, or deliver great value for money. This starts by putting customers at the centre of decision-making, using data to identify what they really want and using that information to entice and persuade them to shop.

Retailers can’t afford to be negative, nor can they afford to stand still, Peter Luff concludes: “It will require investment, the latest technology and leading talent to deliver it, but at its core it’s very much back to basics for retailers – driving efficiency, shoring up supply chains and putting the consumers’ needs first.

“It’s also very apparent that the bright light of the cost of living crisis will quickly expose those retailers that fail to identify and answer the current needs of their customers.”


PART II In detail – individual views of the KPMG/IPSOS Retail Performance Think Tank members


Paul Martin, UK Head of Retail, KPMG

Storm clouds were already gathering in the final quarters of 2021, and while the UK economy and UK retail sales grew in the first months of 2022, we expect momentum to slow during the course of the year, as the squeeze on consumer incomes, and the impact of higher energy and commodity prices caused by the conflict in Ukraine is felt. According to KPMG’s Global Economic Outlook, published in April 2022, overall growth for 2022 could reach 3.9%, before slowing to 1.1% in 2023. (Source: ONS, KPMG analysis)

Consumer spending is expected to be heavily affected by the squeeze on incomes, as household budgets come under unprecedented pressures from the rising costs of energy and an increasing tax burden. This will cause a marked slowdown in annual consumption growth, from 6.2% in 2021, to 4.3% in 2022 and 0.5% in 2023.

Lower-income households are particularly vulnerable to this year’s rise in utility costs. Households at the lower end of the income distribution potentially stand to lose more than 8% of their total disposable income this year from the combined April and October 2022 energy price cap increases.

In addition, the conflict in Ukraine is expected to lead to rising food prices, both through higher fertiliser costs and wholesale food prices, as well as increased prices of some metals and other commodities. The combination of these pressures could push inflation to an average of 7.9% in 2022, before moderating to 4.1% on average in 2023.

With inflation remaining above the Bank of England’s target of 2% throughout the next two years, we expect to see a gradual tightening of monetary policy over the course of 2022 and 2023.

This means that following three consecutive rate rises since the end of last year, we expect two more rate increases this year, although further increases are possible if inflation expectations increase significantly, followed by a modest tightening next year. The Bank of England can do little to combat high global energy and commodity prices, while their impact on inflation at the relevant policy horizon of 2-3 years’ time is also likely to be limited. Instead, one of the key metrics for monetary policy is the pace of wage pressures, which are indicative of domestic demand imbalances that monetary policy can address. Our own view is that this pace of tightening is consistent with inflation returning towards the Bank of England’s target level of 2% in the second half of 2024.

It is also important to highlight that over the last 2 years many retail categories have benefited from reduced expenditure across other areas of spend such as hospitality and travel. With all COVID-19 restrictions now lifted in the UK, this is likely to result in consumers wanting to catch up on missed holidays and events, which will result in further spend being diverted from the retail sector.

Retail price inflation may mask the overall picture on the surface, although I believe that the two biggest areas of short-mid-term focus for UK retailers will be cost-efficiency, alongside the operational resilience agenda.

Range and assortment planning, understanding how to lower the cost-to-serve, optimising real-estate portfolios, re-evaluating price and promotion tactics, re-engineering supply chain networks, addressing workforce for the future challenges and assessing which technology investments to make will all be priorities for retailers throughout 2022. These priorities will all need to be addressed in parallel to the longer-term requirement to evolve their business models and urgently address the ESG agenda.

In summary, 2022 could be a challenging year for retail with many competing priorities, although it is likely that 2023 could be an even greater challenge.


Peter Luff, Managing Director, Ipsos Retail Performance

Energy prices are up by 1/3 already, fuel prices have jumped similarly in 2022. Grocery is up 8% YoY Feb 2022, with further increases due. With further pressure on labour costs and partly to keep up with inflation but also driven by a shortage of labour at the lower end there will be further additional pressure on the economy. House inflation means the new entrants to the market will find it increasingly difficult for the first time purchase without making cut backs in other areas of spend.

Inflation overall is increasing and for many they may well see interest at level they have never experienced and never prepared for with uniquely high average personal debt at this stage.


Average Household Debt in the UK | NimbleFins

This may not be a moment in time seismic crash as in 2008, but it could be more of a squeeze on free cash as seen in the 80’s over the next 6-9 months for the next two to three years.

In context of Mazlows hierarchy of needs people will be pushed to spend a greater proportion of their income on basic needs first and foremost.



Ultimately for retail spend it will need to deliver value for money. While the masses will perhaps still want some element of Psychological & self-fulfilment needs it will be on an increasingly tight budget.

Retail will need to review its product line up, it will need to look at its route to market and be very selective about its approach. This could be about closing further bricks and mortar stores but also reviewing online shipping and importantly returns charge, looking at customer self-serve in store and automating the order to delivery process of on-line sales.


Maureen Hinton, Group Retail Research Director, GlobalData Plc

In the UK consumer price inflation was running at 5.5% in February, as the impact of COVID on supply chains and manufacturing continued to impact prices.  Food and drink inflation of 5.1% was the highest it has been since 2011, but retail spending increased by 9.0% on 2021 as consumers made up for restrictions the previous year.

However, this was before the increase in the energy price cap came into force in April, driven by gas prices reaching a 30-year high. This adds £693 to the annual budget to those paying by direct debit, and £708 to those on prepayment rates (which tend to be those on the lowest incomes) and will affect 22 million people according to Ofcom. This was also before the impact of the Ukraine/Russia conflict took effect, increasing the prices and availability of key staples such as grain and oilseeds – and the fertilizers to maximise crop yields, and before the rise in National Insurance contributions and council tax increases.


Source: ONS % increase

Consumers are very aware of the new pressures on their budgets and of retail price increases. In GlobalData’s latest monthly trend tracker 84% said they had noticed food price increases and 70% are expecting overall inflation to worsen over the next six months, a view that is universal across the regions.

Though a hot spring and summer will help with energy usage, overall household expenditure will remain higher than previously, and the impact on harvests and supply will ensure food prices will continue to rise, even if there is an early, and beneficial, resolution to the Ukraine conflict, which appears unlikely. Though pay is rising (by an average of 3.8% in the year to Jan 2022) this does not outstrip inflation. Therefore, cost pressures will continue to impact spending to at least the end of the year.

According to the ONS, the weekly expenditure per household with an average 2.4 inhabitants in 2020 was £587 but this is excluding mortgage interest payments and council tax. It translates into a net income of over £30,000 to cover this and as 62% of the UK’s 28 million households have a gross income of £39,999 or less, this level of expenditure is not universally sustainable as prices and costs increase – especially for households with more than the average 2.4 occupants and the lowest incomes.

These consumers on lower incomes (which covers most of the country, excluding the South East and parts of Scotland) will be looking for value and cutting back on discretionary spending, such as eating out. This is good for budget retailers and supermarkets, but a cutback in volumes will make it challenging as scale is essential to maintain low prices. Furthermore, retailers are also having to face cost increases – pay rises and increasing operating and supply chain costs.


Source: ONS


Source: HMRC

At the other end of the scale, those on high incomes who have been in jobs during the pandemic and saved money will be less effected – though are likely to choose to spend more on travel and holidays now they can, rather than shopping. However, an increase in tourism and the access to physical shopping will boost sales for luxury and premium retailers whose customers are less impacted by inflation – though this is a smaller share of the market.  It is the mainstream retailers who will have to give consumers a very good reason to spend with them – price being a major factor.   This will make 2022 yet another challenging year for retailers.


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

This year should have been exceptionally strong for retailers but the bad news is that we now expect a significant deterioration of the personal finances of millions of households in 2022. The fall in disposable income (due to rampant inflation, national insurance increases, escalating energy costs et al) is an unexpected perfect storm which is likely to have a bigger impact on food retail  (i.e. falling volumes sales) than the aftermath of the last global economic crisis. This is not just because 1 in 5 households believe they are now `strugglers` as this group is regrettably consistent overtime. But compounded by more than 50% of households who are experiencing a worsening financial situation (despite a rebound from the restrictions of the pandemic) or are still cautiously watching what they spend. All 3 cohorts are expected  to make changes to household spend this year and this will move beyond discretionary non-food to moderating spend on the weekly food shop, with only 25% of households believing they are not impacted. (NielsenIQ New Economic Divide 2022).

This change in behaviour is already happening. Volume sales at the Grocery Multiples fell 7% in March 2022 (NielsenIQ Scantrack) which was more than expected considering the tough lockdown comparatives. There has also been a precipitous shift towards private label in recent weeks (always a safe haven for shoppers needing to save money), and a further increase in spend at Aldi and Lidl where a new high of a 20% market share will be hit sooner, in early Q2 2022. These underlying trends will continue for months to come with only limited respite around events (n.b World Cup 2022 starts in November) or sustained periods of summer sunshine to encourage spending.

So food retailers need to plan for a more significant adjustment to shopping habits than had been expected as changes to basket mix and trading down are just the top of the cost-of-living iceberg. We may also be in uncharted territory for the big4 supermarkets unless they `protect` their most loyal (higher spending) shoppers. Otherwise the squeeze will lead to these shoppers shopping less often at large stores e.g. limiting the number of top-up visits, or shopping more in smaller formats with smaller ranges to help manage spend. And potentially spending more online where they can more easily control the total amount spent.

Online is expected to retain over 12% share of fmcg sales this year so spend in physical stores spend is likely to shift to any retailer perceived to offer better value. This will not only be discounters like Aldi or Lidl as was the case in the last downturn, but any supermarket with a strong price message, for example offering differential price discounts for users of loyalty apps, or reward threshold cash vouchers. The shift to digital over the last 3 years will in fact provide some degree of insulation for many supermarkets.

Looking ahead, value sales will return to positive due to inflation but probably be delayed until the early Summer and the outlook is that unlike 2010 when food retail bounced back quickly within 3 months as the economy reflated, an overall recovery in food sales is likely to be delayed until 2023. As we start a new normal where inflation now sets the parameters on growth only food retailers with sustainable scale, a price-led competitive advantage or a deep connection with their customers will be winners.


James Sawley, Head of Retail & Leisure, HSBC UK

Consumers’ willingness to part with their cash is driven by technical and psychological factors. On the technical side, we see CPI peaking at 8.4% in April and plateauing around the 8% mark for the rest of year. Next year inflation should fall sharply in Q2 as the energy price base effect drops out, and as core inflation eases we see 2023 ending at 2.4%. Meanwhile, Average Weekly Earnings are growing around 4% (although clients – all big employers – believe the real world figure is much higher), and given the tight labour market and inflation environment wage growth is likely to remain. Technically therefore consumers purchasing power each month is being eroded by c4% for the rest of this year, to a lesser degree next and should neutralise end of 2023. A key part of the technical story often missed by the media is that many consumers have enjoyed a 15-month period of real wage GROWTH, a boost in house prices (65% of Britons own a home) and a 2-year period of high savings – see charts below. Sadly, the very poorest in society will be disproportionately impacted.


Given the above and speaking to consumer facing companies over the last month since the cost of living crisis narrative escalated, I am observing some common themes …

  1. Expectation of demand weakeness – The news may be full of dire warnings but the data so far point to a very strong start to the year for the UK economy. GDP was stronger-than-expected in January and PMI for Feb suggest strong momentum. Retail sales figures (ONS and BRC), while slowed in Feb, do not seem to be correlated with negative tone consuming all media channels. Perhaps consumers are reading their pay slips and bank balances, rather than the newspapers. That said all sensible CFOs are forecasting a softening of sales through this year and next in the UK and in Europe.
  2. Flight to value/quality – If you dissect the macro picture above, it’s clear the economic conditions are driving different behaviours for different consumer groups. Value operators are winning market share from consumers in the mid-market trading down, and those serving affluent consumers continue to see high demand from a section of society who had seen their balance sheets positively impacted. Speaking with mid-market operators, this is where the impact of slowing sales is being felt the most.
  3. Category dichotomy – The same can be said for different product categories, food will benefit from inflationary environment being inelastic, while we are seeing weakness in certain areas of discretionary items such as fashion in particular. Furniture and garden furniture continues to trade well as they work through the backlog of demand, while soft furnishings and electronics are weaker (following a good run).
  4. Leisure trumping Retail – It is clear to me that consumers are prioritising leisure pursuits and socialising over discretionary retail spend, judging by the relative performance of our hospitality clients. This might seem obvious after a long period of social abstinence, but I think it speaks to something deeper in the cultural fabric of the Great British public, we will always find money to be social.
  5. The cost of doing business crisis – Retailers are feeling more inflation than consumers. Demand is less of an issue on retailers’ minds compared with mitigating the increased costs of commodities, manufacturing, freight, shipping and labour. All of which are rising faster than consumer prices. Retailers with margin to play with and strong balance sheets will be able to ride out this period of margin pressure (it’s going to get worse before it gets better). I expect to see some more stress in the sector for less well capitalised businesses over the next 18 months.

Looking at the medium to long term, Blacklock CEO Larry Fink said in a letter to investors this week that the “The Russian invasion of Ukraine has put an end to the globalisation we have experienced over the last three decades”, truth is Globalisation has been in retreat since 2008 driven by mainly geopolitics, but also supply chain security and sustainability. The invasion will accelerate this and will likely lead to higher input and therefore consumer prices, and lower innovation and productivity in the future. If inflation becomes embedded, then interest rates will also have to rise further reducing spending power. Of course, there’s good inflation and bad inflation. What we have now is scarcity-led inflation driven by one off geopolitical events we can’t control (bad inflation), this is very hard to produce policies to counteract. The future hinges of the outcome of the war but retailers need to prepare for the worse (and hope for the best) by continuing to bolster agility and security in their supply chains, drive efficiency and produce products which represent desire and/or value for money.


Martin Hayward, Founder – Hayward Strategy and Futures

Many UK consumers are suffering from crisis fatigue, or maybe cry-wolf fatigue.

Over the last few months alone we’ve had:

The Brexit Crisis – we’re all going to starve and the economy will tank

The Covid Crisis – we’re all going to die

The Climate Crisis – we’re all going to boil or drown

The Petrol Crisis – there is no petrol

The lorry driver shortage – they’ll be no toys for Christmas and we’re all going to starve

…and now we have a ‘Cost of Living Crisis’.

It’s very exhausting, but unfortunately this is the nature of much modern political discourse and media presentation, chasing short term clicks and impressions by lurching from crisis to crisis.

Thankfully, most of these ‘crises’ were nothing of the sort.

The UK economy is in good relative shape


IMF Forecast Jan 22

The UK has effectively full employment with vacancies at an all-time high and historically low unemployment.


There is plenty of petrol despite the best efforts of a tiny minority of protestors.

The supply chain crisis generally remains elusive.

Rather than worrying about global warming, most people are more concerned about warming their house.

However, that said, 2022 has clearly begun with some proper, as Harold McMillan famously said , “Events, dear boy, events”.

Russia’s aggression in Ukraine has exacerbated an already very real surge in inflation around the world, driven initially by the return to normality after lockdowns.

For those, who have grown up in a seemingly perpetual low inflation environment, this is a major shock. Most economic forecasts however, expect this surge to be short-lived.


Bank of England Monetary Policy Report Feb 2022

In the short term however, there will clearly be a squeeze on the spending power of a significant number of households.

Whether this constitutes a ‘crisis’ remains debateable. In a growing economy, with no shortage of vacancies, the inflationary squeeze will be uncomfortable but manageable. Sometimes, choices have to be made about what to spend money on and this is going to be one of those periods.

On the plus side, the treasury estimated that the average household in the UK ended 2021 with over £8000 extra in savings as a result of lockdowns, and this buffer together with a drop in the savings ratio will enable most households to ride the storm.


The issue for retailers will be that even for those with savings and the means to release cash, the mood to spend will be suppressed by the fear of further cost of living increases and the scary size of some of the headline price increases such as gas and electricity.

Prudence is already a sensible reaction from many households and retailers will have to accept that for the next 6 months at least, many shoppers will need to be and for some, feel like, they’re shopping savvily and cautiously. This will inevitably lead to some trading down, reduced consumption and delayed gratification, although big ticket items like holidays may contradict this trend due to the savings legacy and enforced frugality of lockdowns.

It is good for the industry to show that it understands shopper’s concerns and the need for a degree of caution, but care is required not to overstate the situation and fuel further unease. This will only unnecessarily reduce consumer propensity to spend even further. The fundamentals remain very strong.


Martin Newman, The Consumer Champion

When I was doing my predictions for 2022, I already sensed that this year and next were going to be extremely tough for retailers due to the implications of the rise in the cost of living, inflation, energy costs, supply chain issues et al and their impact upon consumers.

Since December, we’ve had the onset of the war in Ukraine, the impact that this has had on soaring energy costs, potential food shortages as well as the further erosion of consumer confidence or to put it more aptly, a complete lack of confidence. Add to this the interest rate rises that we’ve already seen and will continue to see over the course of the next 12 to 18 months.

While households made significant savings during the various lockdowns in the pandemic, there will in my opinion be a significant reluctance to spend what many consumers will see as their emergency funds. In addition, the rise in the cost of living and ridiculously high energy costs has meant that many households from those on the breadline to the squeezed middle quite simply don’t have disposable income. It is being swallowed up by a plethora of increases in the cost to live.

It is going to be a fight for retailers to maintain their relevance in the face of on-going supply chain issues and the impact these have on product availability. In addition, they are facing into the increases in their own cost structure while at the same time demand will be falling in many categories due to the reduction in disposable income.

With all of this in mind, it is understandable why many businesses focus on the ‘cost to serve.’ And decide that they cannot offer all the experiences that consumers seem to demand. However, this is a somewhat blinkered approach. As all that ends up happening is that the empowered consumer buys elsewhere from a competitor who offers these choices.

We live in a world where consumers are empowered and they can buy anything, anytime, anyplace and from anyone. That is why, focusing on the cost to serve is a flawed strategy.

It has never been more important than it is right now, for retailers to focus on building customer lifetime value and turning customers into fans. The best way to do this is to adopt an empathetic and personalised approach to customers. Lead with purpose and authenticity. Show you care. Show you understand. Walk the talk by reducing prices and finding other ways of adding value to customers when many are in such a difficult situation. This will generate goodwill and will be returned by customers through their lifetime value and advocacy for your brand.


Jonathan De Mello, Founder & CEO, JDM Retail Consulting LLP

The cost of living in the UK is increasing, and as yet shows no signs of abating. Inflation is at its highest rate for 30 years and is set to rise further, and wages have not risen fast enough to match this growth – leading to lower disposable income overall. Disposable incomes are set to fall further given the recent increase in the energy price cap, which has increased energy bills for the average consumer by c.50%. Real household disposable income is forecast to fall by c.2.2% this year according to the OBR, with less affluent consumers having to finance any discretionary spending from savings and credit. The reality is that consumer demand will continue to fall in Q2 and potentially beyond, with recessionary behaviours increasingly evident and a renewed focus on essentials only. Retail Economics forecast that discretionary spend could drop by as much as 19.5% among the UK’s least affluent households.

Retailer costs have risen significantly due to a combination of wage inflation, increased freight costs, the rising cost of raw materials, and a return to full business rates payments from this month. This impact has been felt across all sectors – including Food – with Food prices set to rise by an average of 4.5% this year, according to Trading Economics. Tesco have stated that their costs are up by 5% this year for example – partly driven by wage inflation given a recent 5.8% rise in hourly wages for store and warehouse staff. Bulky goods retail has also been hit by rising costs – forcing retailers to pass some of these costs on to shoppers in the form of increased prices. Topps Tiles, Dunelm and Ikea have all increased their prices recently, with IKEA increasing prices more than most, with a c.10% increase. The electrical goods sector has also been hit hard by rising costs – mainly exorbitant shipping costs coupled with a global microchip shortage. The full effect of this may not be passed on to shoppers however, given many have already upgraded their tech/home entertainment during the pandemic.

The fashion sector is another sector that has seen rising costs and therefore price increases. Next have said that prices for their autumn/winter 2022 range will be 6% higher due to increased freight and manufacturing costs, and wage inflation. Louis Vuitton, Inditex Group and Joules have all also increased prices, with Joules citing a massive 53% increase in operating expenses due to freight costs and wage inflation at its distribution centres. On the other hand, Primark have pledged to freeze prices for shoppers despite rising inflation, but have done so whilst cutting circa 400 jobs in-store.

Depending on how long the cost of living crisis lasts, we could start to see an increased rate of physical store closures, and further pressure on landlords to reduce rents. Rents have dropped considerably since the onset of the pandemic however, with retailers mainly citing the return of full business rates as their major concern from a property cost perspective. The business rates support measures announced in October 2021 (50% relief on bills up to £110,000 per business) are practically meaningless for retailers with more than a couple of stores. M&S and Wilko have both recently announced store closures due to rising costs, and more retailers will likely follow suit if costs continue to remain as high as they are. The alternative to store closures is workforce restructuring, including redundancies, as exemplified by Primark and Gymshark recently. Product innovation is also a potential solution, with Asda rolling out a new 300 product ‘Just Essentials’ budget range. Meanwhile, Morrisons’ new owner CD&R have approved plans to sell off its £500m property portfolio – this will help mitigate the impact of the cost of living crisis, assuming of course that sale monies are invested back into the business.


Ruth Gregory, Senior UK Economist, Capital Economics

The fall in real household disposable incomes this year, which is likely to be the biggest since the late 1970s, has been widely reported. At -1.6% in February, real pay growth excluding bonuses is already negative and will become increasingly so in the months ahead as inflation rises from its 30-year high of 7.0% in March, possibly to a peak of about 8.7% in April. Indeed, the 10% m/m jump in fuel prices in March was the largest monthly rise on record. The 54% rise in utility prices on 1st April will add an extra 1.6 percentage points to CPI inflation in April. And the surge in agricultural commodity prices triggered by the war in Ukraine means that food inflation may soon climb from 5.9% in March to above 7%. As such, it seems likely that CPI inflation will remain above 7.0% this year and that inflation will be a bigger drag on real incomes in 2022 than in any year since records began in 1955.

Much less has been made of the prop the labour market is giving to households’ real incomes. That doesn’t mean that individuals aren’t going to have to endure a lot of pain. But for the economy as a whole, some of the pain will be dulled by both employment and earnings rising further. The unemployment rate fell to its pre-pandemic level of 3.8% in February. This means a larger share of the population is receiving an income than at almost any time since 1975. Meanwhile, the fall in the unemployment rate and a diminished supply of workers has fuelled faster wage growth. The 3myy rate of average earnings growth rose from 4.8% in January to 5.4% in February.

All in all, households’ overall real disposable income looks set on to fall by 1.7% this year. That wouldn’t quite be the biggest fall on record (it would need to be larger than the 1.8% drop in 1977 to reach that marker). But it would still be big.

Perhaps what’s more important than the precise size of the fall in real incomes is how households respond to it. That will go a long way to determining whether or not there are outright falls in consumer spending. Admittedly, sentiment is already very low which may encourage consumers to save more for precautionary reasons. The GfK measure of consumer confidence has declined for four months in a row to a 17-month low and is now at a level associated in the past with declines in spending.

But the drop in the saving rate from 8.6% in Q3 to 6.8% in Q4 shows that households are willing to save a smaller share of their income to keep spending. It’s true that with the saving rate back below the 1998-2019 average of 7.0%, there is now less scope for it to fall further. But the £4.0bn rise in cash sitting in households’ bank accounts in February, which was smaller than the 2019 average rise of £4.6bn, suggests that households have stopped adding to their excess savings and have begun to reduce them. The stock of excess savings is now estimated to have fallen from £161.8bn in January to £161.2bn in February.  The £1.9bn leap in consumer credit in February also suggests that households had the confidence to borrow to smooth their spending. So consumers will probably still be able to raise their spending a bit by reducing their stocks of excess savings they built up during the pandemic and/or borrowing more.

Overall, with household balance sheets starting from a decent position and the labour market still strong, there is scope for consumer spending to continue to rise as real incomes fall. That is why we continue to expect consumer spending growth to average about 0.2% q/q over the remainder of 2022. And as real pay starts to increase again, we expect a 2.7% rise in real spending next year.