Consumers may not be confident of the economic outlook, so retailers need to be ready to fight this with subtle changes to their marketing messages and propositions, finds Nick Hughes

When news broke on January 27 this year that Britain was officially out of recession, it came with an ominous caveat from politicians and economists that the road to recovery would be a slow and painful one. Seven months on and those predictions are proving prescient. Consumer price inflation is running at 3.1% - well above the Government target of 2% - and plans drawn up for further swingeing budget cuts threaten the jobs of thousands of public sector workers.

Austerity Britain is living up to its bleak billing and the sombre mood has started to permeate the high street. Until recently retail sales figures had remained relatively buoyant in the context of the challenging macroeconomic environment. However, in July the

British Retail Consortium’s (BRC) monthly retail sales monitor showed like-for-like sales grew just 0.5%, held back by what director-general Stephen Robertson described as “poor results for non-food retailing”. The BRC’s gloomy prognosis came just a week after Next had remarked on “a noticeable cooling in retail demand in recent months” in its first-half trading update, adding that it was budgeting for total retail sales to be in the range of -1.5% to +1.5% for the second half.

If these figures in themselves are not cause enough for concern, a consumer insight survey from GfK NOP given to Retail Week has concluded that a drastic cutback in household spending could fuel a double dip recession. Six in 10 consumers surveyed believe the economy will get worse before it gets better, two-fifths plan to sacrifice the purchase of major household items like furniture and electrical goods, such as TVs, and more than a third will cutback on going out, eating and drinking.

As retailers gear up for the key pre-Christmas trading period, these findings suggest that low consumer confidence could have an impact on how shoppers behave in the run-up to December 25. “I think that the public almost has permission to have an austere Christmas this year,” says GfK NOP director of consumer products and retail Pam Armstrong. Armstrong predicts that discretionary Christmas spend will be the first in the firing line as consumers cutback on presents for friends and extended family. “No one’s going to think you’re Scrooge if you decide you’re not going to buy them a present this year,” she suggests.

Christmas challenge

The prevailing mood of prudence means retailers have a challenge on their hands to tailor their Christmas marketing to appeal to cash-strapped consumers. But how, amid the inevitable wall of noise in the run-up to Christmas, can marketeers ensure their message is heard above the din?

Armstrong believes retailers that find innovative ways of talking to consumers will be best placed to prosper. She claims deep-cut price promotions won’t be sufficient to entice consumers to spend freely. “I think there still could be an opportunity to add value through clever marketing, but I think retailers are going to have to think carefully about how to structure their promotions,” she says.

Communicating a strong valuemessage will clearly be a marketing imperative. John Lewis enjoyed considerable success with its Value range last Christmas. Launched in September 2009, the range has now grown to more than 300 products, from small utensils to larger household items.

John Lewis director of retail operations Andrew Murphy believes the retailer’s strong value proposition will stand it in good stead for Christmas trading. “Consumers will no doubt see plenty of promotional activity from other retailers to encourage them to part with their cash. Our job is to make sure consumers understand they will always get the best possible deal when shopping at John Lewis, no matter what is changing around them,” says Murphy.

John Lewis’s ‘Never Knowingly Undersold’ promise means not only will it match the prices of its competitors but it will also be the last retailer to put its prices up when the rate of VAT moves to 20% next year, says Murphy.

Indeed, the January VAT hike adds a whole new dimension to this year’s Christmas trading period. Four in 10 consumers say they will bring forward major purchases ahead of the VAT increase and Armstrong believes a lot of retailers will respond by pulling forward January Sales to beat the hike. “I think some retailers will effectively offer to pay the rise in VAT for consumers. It’s an interesting idea,” she says.

Using the increase as a reason to bring forward big-ticket purchases certainly worked as an argument last year, when the rate reverted to 17.5% from 15%, but can the same trick really work twice? Not everyone is convinced. Janine Woodcock, managing partner at direct agency Indicia, says paying the VAT is “a me-too strategy, as everyone will be doing the same thing”, while The Perfume Shop marketing director Matt Walburn insists it will not be bringing forward its January Sale to beat the VAT hike as it “continues to be a key trading event both for our business and our customers in the post Christmas period”.

Valuable message

Asda’s new marketing director Jon Owen says talk of funding the 2.5 percentage point increment in VAT is simply “a little part of the noise” and stresses Asda will not be making a big deal of it. “I think some of our higher-priced competitors will probably make slightly more of the fact that there’s a VAT rise coming and they will play around with the price a little bit,” he says.

Instead, Asda, which had a disappointing 2009 Christmas compared with rivals, and last week announced a dip in like-for-like second-quarter sales, plans to hammer home its value for money proposition. “This year the challenge is going to be in explaining to customers about the ranges of Christmas products we have as well as the strength of the price positioning,” says Owen. “That’s the important message we want to convey to customers.”

The first prong of the attack will be a new ad campaign championing Asda’s Price Guarantee tool, which promises to refund consumers the difference if shoppers can find a basket of goods cheaper elsewhere. Owen says the campaign, which lands at the end of August, will focus on “the benefits, the ease of checking and the real product attributes of the Price Guarantee”. It’s all part of Asda’s strategy to move away from “here today gone tomorrow” promotions back to its mantra of Everyday Low Price on staples such as eggs, milk and sugar.

Quality is also back on the agenda following new chief executive Andy Clarke’s tacit admission that Asda lost its focus on food quality last Christmas. Owen has “big plans”for Asda’s Extra Special range and will also improve its gifting and home and leisure offer. Other, as yet unspecified, initiatives around service and in-store experience will land between now and Christmas. Owen promises that these represent a genuinely different way of running the business and “will create significant change in the industry”.

Armstrong suggests the austere climate makes consumers more likely to switch between grocery retailers. But while she believes the economic climate will have a “slight impact” on food retail, the effects are likely to be felt more keenly by retailers of more discretionary items.

Perfume arguably falls into this category. Walburn says the key to engaging consumers in the current economic climate is to continually push the value message - underpinned by bespoke service and product range. One of The Perfume Shop’s assets, he suggests, is its vast range of fragrances available at a spectrum of price points. “We can cater for shoppers looking to indulge in the more expensive designer fragrances and equally we can look after consumers who wish to spend under £10 on their perfume purchases,” he says.

Another approach

Marketing experts agree that price competitiveness will be a vital string to a retailer’s bow this festive season, but there are other ways in which value can be leveraged. Offering credit could prove an effective marketing strategy, according to Woodcock, who also suggests that “retailers that offer really clever gift finder functionality, for example using smartphone apps to broaden appeal, may win through”.

Joint offers, “such as a new flat screen TV that comes with free Sky”, will appeal to consumers who want something for nothing, according to Dom Robertson, managing director of experiential agency RPM.

Likewise, financial incentives such as holiday or retail vouchers can prove effective in boosting sales. “Both these tactics are good substitutes to straight discounting as they help maintain the value of the products and brands, while also giving the consumer the feeling of good value,” says Robertson.

Gift vouchers and discount vouchers could also prove important tools, not only in stimulating Christmas spend but encouraging repeat consumption in the new year. “By sending an email offering users a gift card of £15 if they spend £50 online, it not only ensures that you are making your customer feel good but you are also encouraging repeat purchases,” says Simon Bowker, UK managing director of email marketing agency eCircle.

Whatever strategy they choose, marketeers will have to find increasingly innovative ways to break through the wall of noise. As Robertson points out: “Many Christmas campaigns reflect little more than a brand’s desire to be seen and heard in this busy season.”

In the boom times, merely being on the high street may have been sufficient to ensure a bumper Christmas. In Austerity Britain, only the fittest and smartest retailers will prosper.

Things can only get… worse?

Senior retail executives are united in their belief that while trading is tough, it’s not nearly as bad as it has been in the recent past. “We feel alarmist talk is wide of the mark,” says John Lewis director of retail operations Andrew Murphy. “Consumers are much more confident than during the depths of the recession.”

Asda marketing director Jon Owen agrees that “the market’s tough but it’s not catastrophic”. He continues: “We’re in this slightly strange situation where everyone knows what is coming but actually at the moment, if the household remains in employment, disposable income is under pressure but not savagely down.”

The respite could be short lived, however. Asda’s own Income Tracker tool suggests that things are about to take a turn for the worse as consumers are confronted with a perfect storm of rising inflation, high unemployment and the January increase in VAT.

Economist CEBR which measures the data for the Income Tracker, predicts that UK families could face the lowest amount of disposable income for more than two years in the final quarter of 2010. Disposable income in December is predicted to be £172 - £5 lower than December 2009 and the same level as December 2008 when the UK economy entered recession. “We see things as pretty tough for the consumer,” says CEBR managing economist Charles Davis. “We are looking at really weak real income growth, and we expect that to continue in 2011.”