UK report: Consumers to alter grocery shopping habits, cut back on eating out

Posted by Daniel Palmer on 7th August 2008

Consumers are feeling increasingly worse off on a month-by-month basis as their disposable income dwindles, according to new research by PricewaterhouseCoopers LLP.

The study found that consumers would be willing to cut back on eating out if times got tougher, while many suggested they would be willing to go to discount supermarkets to reduce costs.

Consumers are getting more nervous, with consumer spending growth predicted to slow to just 0.5% in 2009. Nearly 60% of consumers surveyed by PricewaterhouseCoopers last month think their household will be worse off in the next 12 months. This is a clear deterioration since the April survey when 37% of consumers surveyed thought they would have less disposable income (money remaining after household bills and credit card payments) in the next year. Lower income groups and older consumers are the most concerned, with young people optimistically claiming to believe they will be more resilient to any downturn.

As a recession becomes more likely in the UK, many observers are looking back to the early 1990s to help predict what might happen. However, is that a good benchmark?

Since the downturn of the 1990s certain categories of consumer spending have shifted from being ‘discretionary’ to almost becoming ‘essential’, such as eating out, holidays and mobile phones- i.e. would today’s consumers stop spending in these areas if their income was squeezed? At the same time some elements of consumer spend may have become more discretionary in nature, for example clothes shopping (because of ‘fast fashion’) and grocery shopping (e.g. premium ranges in supermarkets). These shifts, combined with structural changes in the market mean that things could be quite different this time round.

Olivia Gillan, retail partner in the strategy group, PricewaterhouseCoopers LLP, commented that the last downturn merely provides a good starting point for predicting the impact of a recession today. “The performance of certain retailers and categories during the 1990s recession gives an indication of the winners and losers of the current downturn,” she said. “However a lot has changed over the last 15 years. New ‘value’ players have emerged, additional space has been added, and consumers have been spending more on discretionary items – treating themselves to luxury ready meals, or snapping up a cheap catwalk copy top only to throw it away after a couple of uses. As a result, some sectors will be hit differently this time around.”

This time versus last time
In the early 1990s, the sectors impacted the most, seeing the deepest and longest declines, were big ticket items where purchases can be delayed (e.g. cars and appliances) and discretionary sectors where consumers can reduce consumption or switch to cheaper alternatives (e.g. restaurants and air travel). Similar overall dynamics are expected in any potential downturn now, with big ticket and discretionary sectors expected to be the most impacted. According to the PwC survey, consumers claim that if forced to cut spending, they would particularly cut back on eating out, holidays, electrical goods and clothing over the coming year. Alarmingly for the restaurant sector, 43% indicated they would cut back on eating out and takeaways.

Grocery Sector
The impact of the early 1990s recession on the grocery sector was very limited. However, since then grocery purchasing has arguably become more discretionary as people have treated themselves by trading up to supermarkets’ ‘finest’ or ‘best’ ranges. As a result, this time round, the sector could be hit harder if consumers rein in their spend by cutting out unnecessary luxuries and trading down to cheaper value lines and promoted items in store.

The survey discovered that 58% said they would buy fewer items, 57% would buy more on sale and 51% said they would buy cheaper alternatives.

The other big difference is that the likes of Aldi, Lidl and Netto (discount supermarkets) now make up nearly 6% of the grocery market – they simply weren’t around in the early 1990s. This could hit the major supermarkets if consumers start doing more of their shopping in these outlets – our survey suggests 34% of consumers would plan to switch to a cheaper supermarket.

In Australia, Aldi is therefore likely to be a beneficiary, especially given the glowing reports they have been getting in the media following the Grocery Price Inquiry. They only operate on the east coast of Australia currently, but the current environment could initiate strong national growth for the German discount retailer.

Ms Gillan reported that the downturn should not necessarily dictate gloom for retailers and instead could provide an opportunity to set your business up for future prosperity. “Many retailers and leisure operators succeeded in growing through the early 1990s. Then, as now, key to success is a differentiated proposition, a focus on offering consumers value for money, and continued management focus,” she advised. “The downturn should not be an excuse for retailers to stop investing for the future; it can be an opportunity to restructure or pause for breath. It’s about the survival of the fittest.”