Understanding consumer behaviour in a ‘cut back economy’

The cost-of-living crisis seems bleak, but there are also opportunities for businesses to appropriately pivot their products and services to ensure they remain relevant to their core customers. Charlie Kerlin explains how

The current cost-of-living crisis is having a profound impact on the UK economy. Consumers are already feeling the pinch, making a significant difference to how they spend their money. Although already impacting all sectors, this crisis will likely be felt most in retail, food and drink, hospitality and other sectors reliant on discretionary spend, in the months ahead.

Faced with inflation and rising interest rates, household finances in the UK are being stretched. With GfK, the consumer data firm, reporting consumer confidence at a record low in September, fears of a recession have jump-started a ‘cut back economy’.

The Cut Back Economy report, published jointly by Grant Thornton and Retail Economics in July, explored the effects of the current economic climate on discretionary consumer spending in the UK.

The report estimated that the cost-of-living crisis would slash discretionary spend across the UK economy by about £24.9 billion per annum—and Northern Ireland is expected to be hit harder than other parts of the UK—due, in part, to the fact that energy prices are regulated differently in the region.

The least affluent households across the UK are now spending about two-thirds of their entire income on necessities like electricity and the cost of heating oil or gas, and transport.

Eighty-six percent of the households surveyed said they planned to cut back, but some variances exist.

More than a third (36 percent) of those surveyed could be considered ‘financially stressed’. Other significant cohorts identified included ‘squeezed spenders’ (25 percent) and the ‘comfortably cautious’ (25 percent), each planning to cut back spending.

Just 14 percent of respondents said they were determined to be ‘financially immune’, illustrating the vast impact of the cutback economy.

So, how do we speak to the 86 percent, led by the younger generations who are leading the cutback?

Some people will have to cut back by necessity. However, a significant proportion of the population, while more cost-conscious, will still have some level of discretionary spend.

The data shows where and how habits are changing. Consumers are increasingly mobile, seeking to move brands or retailers. There is a shift towards discount supermarkets and own labels, and demand for foodstuffs, such as dry pasta and grain, is increasing exponentially.

In order to allow businesses to pivot, data will be essential. By gathering and analysing relevant data and market trends, companies can better understand the behaviour and intentions of their core customers. What are they willing to compromise on to spend less? Is it lower quality, a lesser experience, or are they prepared to sacrifice convenience?

For example, 35 percent of all households, regardless of how conservative they intend to be when spending, said they would spend less on media subscriptions. Thirty-one percent would spend less on holidays and beauty, showing luxuries are on the chopping block.

Based on the economic modelling in the report, the impact of the cost-of-living crisis will see the retail, leisure and consumer industries in the UK lose £24.9 billion in discretionary spend in the year to April 2023.

Companies must refocus on the core customers that retain spending power and ensure their product is appropriate to that market segment, while also offering value for money and ways to mitigate the challenges their customers face. This will help them to generate goodwill and loyalty as people pinch their pennies.

We are seeing businesses work their contingency plans, seeking ways to become more efficient, optimise production and reduce waste. Financial resilience will be a crucial area of focus for the foreseeable future.

It will be a challenge, undoubtedly, but understanding consumers and their behaviour is key to navigating the period ahead.