At a glance: what you will learn from this report 

With UK consumers facing the worst cost-of-living crisis in a generation, Retail Week surveyed 1,000 people to understand how they are feeling, what they are spending their money on, what their plans are, and how they feel about the future.

Almost everyone has concerns, with 90% saying they are worried about rising costs and within that more than half (51%) are very worried. Many are also experiencing a loss in income and nearly everyone has experienced some form of increase in basic monthly costs, whether that is from higher rents or mortgage payments, increased energy bills, or both. 

Food inflation is causing further headaches and, in response, customers are cutting back on discretionary categories, such as fashion and big-ticket items, in a bid to afford their necessary bills. Many are planning to cut back this year at Christmas, with food again likely to absorb much of their budgets. 

Almost as problematic as spending cuts is the economic uncertainty our survey uncovered, with few feeling confident about the coming 12 months and many wanting to save more and spend less.

The challenges for retailers are stark: somehow they must navigate this tricky consumer landscape, supporting their customers and staff through it, while also facing increased costs and squeezed margins themselves.

But there are opportunities as well. Shoppers will remember the brands that did their bit to help, or that offered a consistently strong customer experience which made their lives a bit easier. There are brands that, because of their customer-centric approach to value and experience, are sticking in the minds of consumers when it comes to them choosing where to spend their hard-earned cash (explored in chapter five).

Looking forward, retailers will need to be creative in how they support their customers and win spend in a challenging market. This doesn’t just need to involve investments in low prices —  although that will clearly help — but also education, helpful ideas for budgeting, small policy changes that make processes such as returns a bit easier, and a consistent and efficient shopping experience will all provide the support and familiarity shoppers want.

Retailers and consumers are facing a tricky year. No one is looking forward to responding to such a bleak prognosis so soon after the huge challenges of the Covid pandemic, but with the right approach and an open mind towards doing things differently, there will be a way through it.

Methodology 

Retail Week surveyed a nationally representative pool of UK consumers, with proportional splits across age, gender and location, in October 2022. In addition to this, in-depth interviews were conducted with retailers and industry professionals to analyse the trends driving consumer behaviour.

Retail experts we spoke to:

Winning strategies

What this chapter will tell you: 

• Consumers across the board are experiencing a deeply challenging cost-of-living crisis, with 90% worried about rising living costs
• People approaching retirement age (aged 55-64) are mostly likely to be very worried about the situation — significantly more than those aged 65+, who are more likely to have already retired
• Women appear to be more concerned than men, and Wales and Scotland have been hit harder than England, with more people in these regions reporting a drop in income
• The youngest consumers in the survey (aged 18-24) are most likely to have experienced a drop in income

Household costs are going up across the board —food, fuel, interest rates, energy— which is having a huge impact on people's lives. According to Office for National Statistics data, two-thirds of households say they are spending less on non-essentials and using less gas and electricity, and nearly half the population don't think they will be able to save any money over the next 12 months, up from one-third last year.

More concerning is that a third say they would be unable to afford an unexpected but necessary expense of £850 — a measure of the risk of poverty — an increase of five percentage points.

The ONS data looked at changes to people's financial situation in the six months to March 2022, which was before households were dealing with the full impact of April’s cost of living rises when the cap energy prices increased.

As a result, consumers are having to carefully plan what they spend their money on and people are relying on credit.

Bank of England data showed that in August 2022 the annual growth rate of credit card borrowing was 12.9%, the highest since October 2005.

Buy now, pay later usage has also risen to the highest point and, according to data from GlobalData, the market will surpass $1tn by 2030,

Shoppers are also starting to cut back their spending where they can, with discretionary categories the first to be reduced.

“Different households are of course experiencing the cost-of-living crisis differently and people’s priorities will vary, but retail categories which rely on more discretionary spending will clearly be the first ones that consumers cut,” says Jo Parman, strategic insights director at data analytics and brand consulting company Kantar. “We’re already tracking signs of shoppers deferring DIY and homeware purchases, for example.” 

Against this backdrop, Retail Week’s survey of 1,000 UK consumers explores how people are feeling, what they’re spending their money on and what their plans are for the near future. The figures paint a stark picture: 90% say they are worried about the rise in the cost-of-living, and within that more than half (51%) report being very worried.

Many have experienced a loss in income. Nearly a third (30%) say they earn less as a household than they did pre-pandemic. Just 14% say they earn more while 48% report there has been no change. 

As a result, shoppers are cutting back, saving more, and switching to lower cost brands. Discount supermarket Aldi — which in September became the fourth largest UK supermarket chain, replacing Morrisons in the Big Four — gained an additional 1.65 million customers in the 12 weeks to 2 October, 2022, according to Kantar.

Aldi’s managing director of buying Julie Ashfield says: “We are doing everything we can to make food shopping as affordable as possible for millions of households, as well as making our customers’ shopping experience as quick and simple as possible.”

Retailers are not just focusing on consumers, but also working to support staff where they can. In October, Aldi committed to paying all store staff across the country at least £11 per hour from January (£12.45 for those working inside the M25), outstripping the Living Wage Foundation markers and hiking its base pay to 15% above what it was a year ago.

In April, Asda announced it was investing £73m in cost-of-living measures, which included raising shop floor wages by 44p to £10.10 an hour.

Where is spending rising and falling?

What does monthly spending look like when it comes to actual amounts, and where are consumers cutting back? To get an idea of how the recent financial situation has impacted people's budgets, respondents were asked about how their estimated monthly spend had changed compared to pre-April 2022.

• 70% of respondents say they have increased their spending on food. This is the only category where a majority of consumers have upped their budgets
• Big-ticket items and fashion are the two categories where consumers are mostly likely to report cutting back, with 40% saying they are spending less in both these areas

As demand drops it can be tempting to resort to fire sale discounts and huge price drops, but it is damaging to brands and to margins to drop too quickly too soon, and there are better alternatives.

Martin Bailey, UK sales director at sales promotion solutions agency Opia, says: "Now more than ever customers want a good deal. Discounting is hard to recover from as it trashes the perceived value of the product. But worse than that, it does nothing to create a personal link with the consumer — and that’s what brands need if they are going to pull consumers towards making a purchase.

"Contrasted with more creative solutions, such as a gift with purchase or product trade-in, these solutions allow you to be more in tune with your customers' needs and create a positive connection that goes way beyond the purchase."

FOOD: For 70% of respondents, their spending on food has risen compared to pre-April 2022. The majority (63%) report spending between £101 and £500 a month on food (30% £101-£250 and 33% £251-£500). For 21% their budget is up to £100, for 11% they spend between £501 and £1,000 and 3% spend £1,001 to £1,500. The remaining 2% spend up to £3,000.

The inflationary pressures and unique set of challenges in this category mean that even as consumers spend more, grocers’ profits are falling. Recently Tesco reported a fall in first-half profits caused in part by the impact of inflation but primarily by a decline in year-on-year volumes. Adjusted operating profit fell 9.8% to £1.32bn.

Consumers seems to be turning to own-brand or cheaper ranges. Marks and Spencer recently revealed that its Remarksable range — which comprises 140 everyday items price benchmarked against other supermarkets — now makes up 23% of shopping baskets.

TOYS AND GIFTING: As a category this is not a high priority for most people’s budgets most of the year: more than a third (34%) spend nothing each month on toys and gifting; 54% spend £1-£100; 7% between £101-£250; and the remaining up to £1,500. Just over a third (34%) have reduced their spend in this area while 43% say it remains the same. The 35s-54s are most likely to cut back in this area, with 39% saying they have done so.

In the run up to Christmas spending priorities change and while this year many are cutting back on their budgets, toys and gifting is not being hit as hard as other areas — see chapter 3 for more on this.

Despite a difficult market, retailers selling toys have so far managed to maintain growth. Mattel said in October that it still expected growth in 2023 and The Very Group said it had maintained share in a difficult market when reporting its full-year results in October.

ELECTRICALS: It’s a mixed picture for electricals: just under a third (30%) have reduced their spend, but 25% say their spend in this category has risen. Older shoppers are more likely to cut back in this category than younger – in fact, 47% of the 18-24 age group say they have spent more since April. Monthly budgets range from nothing for 36% of consumers, up to £250 for 53%, 6% spending £251-£500, and the remaining spending up to £3,000.

Retailers are taking a pragmatic approach in response to consumer uncertainty. In July Currys posted an increase in full-year earnings with a 19% uplift in adjusted pre-tax profit to £186m in the year to April 30, but warned of an uncertain outlook, flagging a cost reduction programme to offset soaring energy and fuel bills, which includes identifying savings of £69m from supply chain efficiency, IT and central reorganisation costs, non-product related operational spending and stores.

And in October, while The Very Group posted full-year sales increases in some categories, electricals were down 13.9%, from £863m in 2021 to £742.7m.

FASHION: Budget wise, 44% are spending up to £50 a month, 20% £51 to £100, and only 10% in the £101 to £250 bracket and 5% in the £250 to £500 range; more people than those last two combined (18%) say they spend nothing on fashion each month. A significant 40% of respondents say they have reduced their spending on fashion, with women (43%) slightly more likely to than men (38%). Younger shoppers appear to be cutting back less, with 27% of 18-24s saying they have spent less, compared with 35% spending more. By comparison, 46% of those aged 55-64 say they are spending less. 

This varied approach to fashion spending is reflected in retailers’ recent performances. In October fast fashion brand Quiz reported a 37% jump in sales as its customers sought “glamorous looks at value prices”, and The Very Group reported a 6% increase in fashion sales in its recent full-year results. However, Asos reported full-year losses of £9.8m recently, saying it is “difficult to predict” how consumers will shop next year.

SPORTS AND LEISURE: This category has been hit hard, with 43% saying they spend nothing per month, 32% spend up to £50, and a further 14% between £51 and £100. Only 7% spend £101 to £250, and 2% £251 to £500. A third (33%) have tightened their belts and are spending less in this category compared with 2021.

Retailers in this category are wary of the coming year. Despite posting a strong set of first-half results, JD Sports' non-executive chair Andrew Higginson struck a cautious tone in September “given the widespread macroeconomic uncertainty, inflationary pressures and the potential for further disruption to the supply chain with industrial action a continuing risk in many markets”.

ENTERTAINMENT AND EATING OUT: While consumers are still spending in this category —  59% spend up to £100 per month, 14% spend £101 to £250 and 5% splash out between £251 and £500— people are still cutting back (43%) compared with last year. The 55-64 age group (53%) is most likely to cut back and women (47%) more so than men (38%). And 17% say they don’t spend in this category at all. 

Some retailers are seeing the opportunity to help people through this difficult time by offering cheaper at-home experiences, similar to during the pandemic. M&S, for example, said it was launching more Dine In and Gastropub meals.

The restaurant industry is battling rising food, energy and wage costs and just last month the industry body UKHospitality warned of a tidal wave of closures unless government support was forthcoming.

BIG-TICKET ITEMS: The majority of people (58%) have spent nothing on big-ticket items per month since April 2022, while 23% have spent up to £100 a month, 9% £101 to £250, and 5% £251 to £500. And 40% are spending less compared with last year. Shoppers in Scotland (57%) are particularly likely to have cut back.

The challenges for some homeware retailers are clearly visible. Made.com and Eve Sleep both went into administration recently — Next has now acquired Made and Bensons for Beds has taken over Eve.

"When it comes to big-ticket items, consumers will want to know they are spending their money wisely on purchasing the right product that is going to last them a long time," says Dan Meader, COO at Opia. "They’re going to be nervous about wasting money on the wrong choice and they will delay making a decision until they’re reassured.

"This makes it more important for retailers to look at the tools at their disposal for closing sales: reliability promotions, warranty upgrades and satisfaction guarantees can all drive differentiation and offer some peace of mind to customers."

GENERAL MERCHANDISE: This category takes up to £100 of spend for 63% of people, and 11% spend £101 to £250. Fewer consumers are cutting back compared with other categories, with 28% saying they have done so. But they are trading down where they can.

This is a trend that Poundland is hoping to cash in on, having opened its first large-format store in Nottingham earlier this year, aiming to attract value-seeking consumers looking to do their weekly shop at the discounter — with the promise of more stores to follow. Chief executive Barry Williams told Retail Week that the store is a "complete shop right across all of the FMCG categories".

And Poundland owner Pepco recently posted group revenue growth of 17.4% .

However, the category is far from immune to inflationary and macroeconomic challenges, with value retailer Wilko drafting in advisors in October as it mulled cost-cutting or restructuring options. 

HEALTH AND BEAUTY: With 74% of consumers spending up to £100 on health and beauty monthly, this category isn’t being hit as hard as others, although only 6% spend £101 to £250 and 15% spend nothing at all. The spending reduction rate, at 31% of consumers, is perhaps a bit more worrying, with 34% of women cutting back, compared with 26% of men. 

Boots has a range of measures in place to help customers through the financial turmoil — such as locking prices on more than 1,500 products and has expanding its Price Advantage scheme offering members discounts on 900 products. It posted a strong performance for the three months to August 2022 as like-for-like sales increased 15.2%.

What this chapter will tell you:

• Consumers are trading down to cheaper brands, and plan to spend less at Christmas
• Food is the only area where a majority of consumers expect to spend more this Christmas
• Subscriptions appear to be holding up with relatively few consumers planning to cancel spend in this area
• Sustainable retailing will need more of a creative approach, using the second-hand economy and food waste apps to reduce impact

IIn response to the rising costs outlined in chapter 2, 78% of respondents are now trading down to buy cheaper brands (women 84%, men 70%). The figure rises to 89% of 35-44s, who are likely to be raising families and therefore have to stretch their spending further to support everyone in their household.

For higher value purchases, people who can afford it are investing in multi-use, high quality items that will last for a long time. Beth Butterwick, chief executive at premium womenswear brand Jigsaw, says: “During the late-summer we observed customers shopping more locally resulting in a slight downturn in online demand. They continue to look for ‘buy-now/wear-now/wear-multiple times’ products, and fewer basket items, but are buying higher value, quality investment pieces.”

Shopping made simple

In response to the challenges many customers are facing, retailers are investing in price and working hard to keep them low. Some are also focusing on making the shopping experience as familiar, easy and comforting as possible. 

Aldi, for example, uses consistent layouts and stocks smaller ranges, meaning customers are familiar with the products and where they are in store. It also says its strategy of low prices across the board, rather than temporary offers or a loyalty scheme that can be complicated, help customers make their shopping decisions more quickly. 

Subscriptions still in demand

One area that doesn’t seem to have been hit too hard by cutbacks so far is subscriptions. Almost half (46%) say their subscriptions — referring to anything from Amazon Prime to Netflix to food delivery service Gousto — have not changed, and 7% say they have signed up to more subscriptions than they were prior to the start of the pandemic in March 2020. Just 11% say they are planning to cancel subscriptions, although this rises to 17% for those aged 35-44. A quarter (25%) say they don’t subscribe to anything, a figure which rises to 51% for those aged 65+.

The subscriptions market has helped some retailers perform well over the past year. Pets at Home and Naked Wines, for instance, both credited subscription offers as helping them increase repeat customers and achieve strong growth.

Pets at Home reported in August that its subscription plans now numbered 1.5 million, generating £135m in annualised revenue and accounting for 8% of group customer revenue. Meanwhile, Naked reported in its 2021/22 full-year update that its subscription service, Angels, grew 9% to 946,000 customers.

Kathryn Huxtable, vice-president of food proposition at recipe box firm Gousto, says the business has been listening to feedback to ensure its offer remains relevant for, and supportive of, customers on tighter budgets. It recently launched a new collection of no-oven recipes to help reduce energy use, including a Sunday roast cooked entirely on the hob. It is also supporting food banks with specially designed meal kit food parcels, and is funding research into the mental health, wellbeing and social impacts of meal kit food parcels in a bid to improve UK-wide emergency food provision.

How can you incentivise customers to buy? 

The current economic situation is leading significant numbers of consumers to hold back on spending on specific items, particularly big-ticket purchases.

Retail Week asked the consumer pool to rank which large purchases they would like to make if they weren’t facing a cost-of-living crisis, from one being the least to 10 being the most. The full chart is below, but when looking at the percentage of consumers that weighted products between seven and 10, on the upper end of the scale, consumers selected: tablet (24%), washing machine (24%), cooker (24%), TV (24%), and laptop (23%) as their top five most desired products. 

For big-ticket items priced £500 or more, they were also asked what would influence them to make a purchase — again with one being the least and 10 being the most. The full chart is above, but if we take the percentage of consumers that weighted these options between seven and 10 on the upper end of the scale, we can see the top five are: a cashback reward (66%), a chance to win your energy bill paid for a year (57%), a trade-in for any working device for a generous cash reward that is more than the device would be worth second-hand (49%), a trade-in reward for any broken or working device for more than the device would be worth second-hand (48%), and a trade-in reward for old power-hungry and inefficient electrical devices, for more than the device would be worth second-hand (43%). 

The follow-up question delved further into what specifically they would prefer as a reward that would most influence their decision to purchase a big-ticket item costing £500 or more, with one being the least and 10 being the most. The full chart is above, but again, if we take the percentage of consumers that weighted these options between seven and 10 on the upper end of the scale, the top five are: travel (46%), fuel card (44%), retailer gift cards (43%), tablets (43%), and Chromebooks (37%).

Opia's Martin Bailey says: "Retailers can drive demand by focusing on affordability solutions, such as trade-in of old devices to reduce upgrade costs, bundling accessories, or offering rewards which help towards food, fuel and energy bills or even holidays, gift cards or cashback."

Retail can be lean and green

After several years of growing consumer demand for better sustainability in retail, the cost-of-living crisis has the potential to derail the progress that has been made.

Celine Fenech, consumer insight lead at global professional services group Deloitte, says the firm’s sustainable consumer research from July found that 52% of consumers believe sustainable products are too expensive.

The rising cost of living is likely to have increased this number. Ethical and sustainable items can be more expensive to produce — particularly in areas such as fashion where a shift to sustainability can require investment in new supply chain processes — and costs are often passed on to the consumer.

However, Kantar’s Jo Parman says both consumers and retailers are finding new ways to commit to the green agenda, even as budgets come under pressure. Many of these — such as buy-back schemes, second-hand shopping and refurbishing services — can also help shoppers combat rising costs.

“These initiatives could really land in the sweet spot for shoppers, helping them make more sustainable choices while also saving money,” Parman adds.

Fenech agrees, pointing to Deloitte research that says a third of consumers are now buying more second-hand goods than they were doing the previous year. Clothing, refurbished electronics and household appliances are all popular choices, with this aspect of sustainable behaviour potentially becoming a legacy of this challenging period. 

Rental is another popular option that has been around for a while, but now mainstream retailers are joining the party — John Lewis launched a fashion rental service in October, while Stella McCartney launched a rental platform for babywear in September. Zara has entered the space, too, launching a service in October for shoppers to book repairs and donate unwanted items both online and in stores.

When it comes to food shopping, retailers can continue to embrace the use of sharing apps such as Olio, which works with brands such as Tesco and Pret a Manger, to list free unwanted food every day to avoid it going to waste, or join the growing number of local community pantries that offer discounted food and a neighbourhood hub.

Recent Kantar data has also shown more shoppers have turned to wonky veg in a bid to save money. Sales of Tesco’s Perfectly Imperfect and Morrison’s Naturally Wonky ranges rose 38% in the 12 weeks to October 2. Less than perfect fruit and vegetables is a significant source of food waste.

What this chapter will tell you:

• Consumer confidence is likely to get worse before it gets better
• The vast majority of people want to spend less and save more, but significant number can’t afford to save
• Families and those with dependents are planning to cut back the most, but the 65+ group, many with no mortgage and a secure pension, is feeling the pressure less

 What does all this mean for the coming year, and what can retailers expect to see consumers doing with their money?

The UK’s economic outlook isn’t great – the economy is expected to contract 0.3% next year, according to macroeconomic survey firm Consensus Economics, based on an average of leading forecasts. Economists think it is likely to get worse before it gets better. Ian Stewart, chief economist at Deloitte, says: “With inflation elevated, interest rates on the rise and the labour market starting to cool, the squeeze on spending is likely to intensify.”

Unsurprisingly, this is leading to considerable uncertainty, with consumers feeling pessimistic about the immediate future. Data and intelligence firm GfK’s monthly consumer confidence index stood at -47 in October, up just two points from an all-time low of -49 in September. 

Joe Staton, client strategy director at GfK, says all index measures remain “severely depressed” but the biggest danger by far is inflation, which is rising at its fastest rate for 40 years. “For ordinary consumers, this web of uncertainty and turmoil amounts to a ‘new abnormal’. The negative environment will deflate future spending plans, and cautious consumers could easily slow the UK economy still further.”

Data from his research shows in more detail consumers’ concerns: 89% say the current UK economic situation is making them reconsider their spending habits, while 79% say they are reducing their spending in some way; 89% also agree they need to be more careful with their spending; while 93% would like to save more money going forward.

Who is cutting back the most?

Economic uncertainty is feeding into decisions relating to how people handle their money, with those who can afford it planning to save more in a bid to build up a safety net: 62% are planning to put money into savings and investments in the next six months, with 15% planning to save more than they did before. At the other end of the scale, 19% are expecting to save less than they have done previously, possibly because inflation has bitten into how far their money will stretch each month.

For some, the rising cost of living means saving is simply not possible – 27% say they cannot afford to save, and this rises to 38% for those aged 55-64 and 37% for the 45-54s, and a further 8% say they won't be saving owing to other spending priorities.

Who is hardest hit?  

Young families and those with dependents living at home are likely to be hardest hit by recent rises to energy bills, and may also be more impacted by interest rate hikes given that many are likely to have higher levels of mortgage debt still to pay back. 

Again, our data backs this up: 86% of those aged 25-34 are reducing their spending in some way, while a huge 94% of those aged 35-44 agree they need to be more careful with their spending; 96% of 45-54s would like to save more money going forward, but this group is also among the least likely to be able to afford to save (37%, compared with just 10% of those aged 18-24).

Meanwhile, younger people and older people are less likely to be planning to adjust their spending — albeit for very different reasons. 

As discussed in chapter three, people aged 65+ are more likely to have no housing costs and as a result are less likely to agree with the statement ‘I am reducing my spending’ – 61% agreed, compared with 79% across all ages and 85% of those aged 35-44.

At the other end of the scale, young people aged 18 to 24 are in some ways hardest hit by the economic struggles. They are most likely to have suffered a loss of income, with 41% of those aged 18-24 earning less than pre-pandemic (compared to 20% of those aged 65+). They are likely to be paying higher housing costs – 48% say these costs have risen, compared to 38% across all age groups.

Despite this, fewer younger people are planning to tighten their belts — 78% agree they are planning to reduce their spending, and while this is a high proportion, relatively it’s less than every other age group. Part of the reason for this could be that this group is less likely to have financial dependents, meaning their bills are lower. It could also be related to having less experience at managing their finances.

As a result of widespread cautiousness around spending in the market, consumers are likely to fall into two camps, both seeking perceived value. 'Perceived' in that this could mean value in the the traditional sense being low prices and discounts, but also on the other end in terms of the quality and durability of goods, and in some cases, how sustainable they are. 

Retailers will need to be careful that their marketing messaging centres around the USP of their particular product and communicates why, in tough times, consumers should be spending with them.

What this chapter will tell you:

• Amazon, Tesco and Asda named as the top three retailers with the best customer experience
• Consumers are looking for value for money and a convenient, easy shopping experience
• Retailers are investing in lower prices, changing policies and thinking of new ways to support shoppers

Among all the challenges the industry is currently facing, some retailers stand out for consumers in offering support, good value and a consistently strong customer experience.

We asked survey respondents, without any prompts, to tell us which global retailers and brands first came to mind for delivering the best shopping experience and our consumers picked the following brands as their top 10: