Retail Week explores how the cost-of-living crisis will impact the way consumers spend and who will be worst affected

With inflation soaring to the highest level in 40 years, households are being squeezed from all directions – with food, fuel and energy prices all reaching new highs.

Data from Grant Thornton and Retail Economics indicates that nine in 10 consumers will be looking to cut back on spending by trading down, shopping less frequently or disregarding certain categories altogether.

Consumers will cut back on £25bn of non-essential spending over the next year, dealing another blow to the retail industry – especially the sectors that were hardest hit by the pandemic.

Retail Week explores how inflation will hit households across the UK and which sectors will feel the pinch.

A polarising effect

Inflation has climbed to a 40-year high and is expected to reach 11% by the end of the year, driven by a surge in energy, food and fuel prices.

While this has negative effects across the board, the level of impact varies depending on income.

 

Lower-income households or those burdened with debt are more vulnerable to inflationary pressures. The data shows less affluent households are experiencing inflation of 11.6%, compared with 9% in wealthier ones.

Poorer households spend more of their income on essentials and are therefore disproportionately affected by rising prices. As inflation is set to rise further in the coming months, discretionary spending will be hit across all financial brackets.

According to the Retail Economics cost-of-living tracker, the average UK household saw their disposable income drop by 10.6% in May, amounting to £127 less to spend on non-essential items.

As budgets are squeezed, many consumers will adopt new recessionary behaviours to cut costs. 

Grant Thornton’s research reveals four specific cohorts of consumers in the cut-back economy: financially distressed, squeezed spenders, comfortably cautious and financially immune.

 

The four cohorts vary by age, with millennials the most financially distressed whereas baby boomers are the most immune.

This will affect the spending habits of certain demographics with knock-on effects depending on a retailer’s category and target customer.

A cut-back economy

According to the research, 28% of households are looking to cut back on all categories. This is not unique to those that are more financially insecure – even the most affluent households are expected to reduce their spending by 7.6%.

Lower-income households will spend 9.6% less, while the average UK household cuts back by 8.1%.

 

Out of all categories, grocery is where consumers plan to cut down on spending most, with 51% of households looking to reduce their food budgets.

The average household is seeking to cut £494 – or £41 per month – on their food shop over the 12 months to April 2023, largely by trading down or economising basket sizes.

Intentions to reduce grocery shopping are highest in low-income households and those under 45 as this category makes up a large proportion of their budget.

Young families with children are the most likely to cut back on their weekly food shop: 65% of those with children will reduce their food spend, compared with 50% of those without.

Ways in which consumers plan to cut back include switching to cheaper private-label brands or discounters (52%), making better use of loyalty cards or vouchers (40%) and buying in bulk more frequently (32%).

Seasonal events like Christmas may be negatively impacted by this as consumers are likely to stick to more budget-friendly options instead of splurging on premium products.

 

Fashion is also high on the consumer agenda when it comes to reducing spending.

The average household plans to cut their apparel spending by 10.6% over the next year, amounting to £3.7bn.

Consumers cutting back on fashion will do so by shopping for new clothes less often (47%) and conducting more research and price comparison (45%) before buying.

Younger shoppers will cut back most in this sector: 58% of Gen Zs plan to decrease their spending on clothing, impacting the retailers targeting them.

Gen Z consumers are also likely to cut spending in hospitality and leisure as rising living costs take priority over going out.

Fifty-eight per cent of 18- to-24-year-olds will reduce their leisure spending, while three in five under-45s will cut back on dining out.

This will mark another blow to the suffering hospitality industry, the sector set to lose £8.5bn in the next year.

Across the hospitality and leisure sectors, 52% of consumers will reduce their spending on restaurants, followed by 50% on takeaways and 37% on both alcohol and cinemas, theatres and other events.

Holidays are slightly more cushioned as pent-up demand from the pandemic means that many consumers are determined to go on holiday this year and have reserved spending for this purpose.

More than half of UK households still plan to go away this summer regardless of the rising cost of living.

The financially distressed cohort is the most likely to have changed their holiday plans slightly by looking for a cheaper alternative abroad or in the UK, while some have cancelled their plans altogether.

Substitution and shopping around 

Cutting spending can include shopping less frequently, shopping around for better deals, taking advantage of discounts or buying second-hand, as well as simply cutting out categories altogether.

 

Substitution is the most common way for consumers to cut down on their spending, but this varies across sectors – 47% of shoppers plan to switch to cheaper alternatives.

In grocery, shoppers are more likely to seek lower-cost options, compared with sectors where brand loyalty is higher such as beauty, pet care or electricals.

The research also indicates that 43% of consumers plan to go shopping less due to the crunch, impacting footfall for both essential and non-essential retailers.

Both the financially distressed consumer and the comfortably cautious are likely to cut down on shopping in general and trade down on goods.

Almost a quarter of consumers plan to buy more second-hand goods, meaning the cost-of-living crisis may drive the circular economy.

Two in five consumers plan to shop around more before purchasing, with fashion, holidays and takeaways being the top categories for this behaviour.

Thirty-six per cent of consumers also plan to take advantage of loyalty schemes and discounts associated with them, while 33% will look to buy in bulk when they can if this is more economical.

It is clear that the cost-of-living crisis will have a detrimental effect on the majority of consumers as they try to balance budgets for both essentials and discretionary categories.

While less affluent households may feel more of a pinch, inflationary pressures have financially and psychologically affected consumers across all demographics.

Many people will be changing their behaviours when it comes to shopping. Younger generations may be looking to socialise less and spend less on fashion, while others will be looking around for the best deals on big-ticket items.

Retailers will need to adapt to a new more cautious consumer, emphasising both their value and values in order to retain loyalty and secure a share of a smaller wallet.