The Deloitte Consumer Tracker Q2 2023

After a strong end to 2022, the new car market saw growth every month in the first half of 2023, with over 147,000 more cars sold than in the same period last year. Double-digit growth in April (+11.6%), May (16.7%) and June (+25.8%) contributed to a strong Q2 performance, with sales 18.4% higher than Q2 2022.

The continued growth in new car sales is a boost for a sector disproportionately affected by COVID-19 and global supply chain issues over the last three and a half years. However, the sector will continue to treat this growth with a degree of caution given that last year’s supply issues mean growth is being measured against a low base - with sales in June 2022 at their lowest level for the month since 1996.

Figures released in May by the SMMT (Society of Motor Manufacturers and Traders) revealed that after three successive quarters of decline, the used car market grew by 4.1% in Q1 2023. As with the new car market, these results have been met with caution as total sales are still below pre-pandemic levels. Although the data for Q2 is not yet available, there is hope that the sector will benefit from prices stabilising and consumer demand continuing. According to Auto Trader, the average price of a second-hand car has increased by 30% in the past three years. However, record high prices of used cars could be set to drop, with the AA recently reporting that the price of the UK’s 20 most popular used cars fell by 2% in Q2 2023 compared with the previous three months.

In a further boost to the sector, UK car manufacturing output increased throughout Q2 2023, with production levels rising by as much as 26.9% in May.

Petrol-powered vehicles remained the most popular fuel type, comprising 41.9% of all new cars sold in the first half of this year. However, battery electric vehicles (BEVs) now command a 16.1% share of the market placing EVs firmly as the second most preferred type of vehicle. When combined with plug-in hybrids (PHEVs), EVs accounted for almost a quarter of all new cars sold in H1 (22.6%). Consumers have shown a growing interest in electric vehicles and the increasing availability of models across all segments of the market are making ownership a more viable option for drivers. However, the 16% share of the market is still well below the target for 2024 (22% of sales) proposed by the government in their consultation on zero-emission vehicles and more will need to be done to support growth in the sector.

OEMs and their suppliers in the UK are also facing a looming profitability challenge around EVs due to changes to the product specific rules of origin (ROO) stipulated in the EU-UK Free Trade Agreement. Several OEMs have raised concerns about the changes which will see the amount of UK and EU material needed for EV’s and EV Batteries to qualify for preferential tariff treatment increasing by as much as 20% for some battery components. With the majority of materials required to build EVs and batteries coming from Asia, many OEMs will be unable to meet the new thresholds meaning that products could be subject to 10% tariff rates, significantly increasing the cost of trade. By raising awareness of the impact these ROO changes will have, manufacturers are hoping to encourage officials to revisit these rules before they come into force in January 2024.

In addition to the cost of buying a car, this quarter has highlighted the rising costs of owning a car and the pressure this puts on consumers. Although the cost of fuel continued to fall throughout the quarter, the Competition and Markets Authority recently found that drivers were paying more for petrol and diesel than before COVID because of weaker competition. As a result, retailers will now be legally bound to provide live pricing data, making it easier for consumers to shop around for the best deals.

In another shock to consumer finances, data from the Office for National Statistics (ONS) saw the rise in the cost of motor insurance far outstripping CPI inflation in May - at 43.1% compared to 8.7%. This rise in insurance premiums has been attributed to inflationary pressures across a broad set of inputs that need to be factored into the cost of insurance. For example, a rise in global prices of raw materials and spare parts needs to be considered in the cost of repairs while record high used car prices have had an impact on the cost of providing a courtesy car.

Despite 11 consecutive months of growth, OEMs (Original Equipment Manufacturers) and dealers will be acutely aware that top-line results do not tell the entire story of performance in the industry. For example, most of the growth is coming from the fleet sector, with businesses continuing to make investments that were delayed by supply issues.

Data from the Deloitte Consumer Tracker shows steady demand, with the percentage of consumers planning to buy a new car in the next three months up marginally from 5.2% in Q1 2023 to 5.4% in Q2. However, with interest rates continuing to rise, both the cost and availability of car loans could also be affected, which could result in reduced demand as consumers prioritise spending in other areas.

Nicholas Smith

Dr Bryn Walton

Stronger than expected performance throughout Q2 led to nominal retail sales volume growth of 0.4% in Q2 2023 compared with the previous quarter, according to data from the Office for National Statistics (ONS). Over the same period retail sales values increased by 1.7% compared with Q4 2022.

Multiple bank holidays, the king’s coronation and a hotter than usual June played their part in driving consumer spending in Q2 2023. According to data from the Deloitte Consumer Tracker, consumers spent more on discretionary items (+4.9 percentage points) this quarter. The most notable quarter-on-quarter growth in non-essential spending was seen in the clothing and footwear sector (+9.7 percentage points), as consumers looked to refresh their wardrobes for the summer ahead.

Despite the slight improvement this quarter, retail sales continue to lag behind inflation indicating that stubbornly high prices across categories have forced consumers to pay more for less. This is supported by data from the Deloitte Consumer Tracker where 85% of those consumers who said they spent more in Q2 2023 indicated it was because prices were going up.

Despite many experts predicting that the jump in online sales seen during the COVID-19 pandemic represented a ‘new normal’, online sales as a share of total retail sales saw a sharp decline from their peak of over 35% in the middle of 2021 and have now plateaued at just over 25% over the last six months.

In the food and grocery sector consumers continue to switch stores and brands to ease pressure on their household budgets. Our data shows that more than one in three (35.6%) consumers are now doing their main food shopping at a discount store, compared with 34.5% last quarter and 33.9% in Q2 last year.

Despite their confidence improving for a third consecutive quarter, consumers will continue to consider affordability in Q3. Retailers will be acutely aware of the lasting effect of stubbornly high inflation on consumer spending power and this, combined with rising interest rates will likely continue to impact retail spending in the quarter ahead.

As consumers continue to manage their budgets more carefully, retailers are under increasing pressure to retain customers. Therefore, getting the fundamentals around price and product mix right will be key to maintaining market share in the quarter ahead. For example, a price sensitive consumer is likely to stay with a retailer that offers good value product ranges and is able to cut the price of core items. In addition, retailers will look to seize an advantage by adapting their loyalty schemes to appeal to the needs of their core customers, with member pricing now a common addition to many pre-existing loyalty schemes.

For most retailers, growing or even maintaining margins will continue to be a challenge this year, given the inflationary environment and a more price-sensitive consumer. Conditions are likely to remain difficult in the consumer sector throughout 2023 as higher interest rates feed through to consumers and businesses, raising the cost of borrowing and supressing consumption. To navigate this period, retailers will continue to focus on cost reduction and performance improvement initiatives. Automation and the use of artificial intelligence will be a key focus for retailers this year, with major gains to be had from freeing up employees from repetitive tasks to focus on higher value work. While the recent excitement around generative AI has seen retailers exploring how it can be used to improve productivity, most retailers have not progressed beyond experimenting with publicly available tools. As a result, retailers are likely to see bigger returns in the short term from more established forms of AI that have a proven history of delivering results in the retail industry.

As inflationary pressures continue to ease, retailers will also need to assess the potential lasting impact of high prices. Many consumers have made changes to where and how they shop, trading down to cheaper brands or own label products in response to the cost of living crisis. If these behaviours persist, retailers will need to demonstrate the value and quality of higher tier products.

Many grocers are already investing in cutting the price on everyday essential products like milk and butter, but further investment will be required to help those consumers most affected by rising prices over the last few years. For example, while retail spending in Q3 normally receives a boost from the back to school market, the additional cost of new school uniforms and equipment will add to the pressure on some households. As a result, we are likely to see a focus on helping families navigate this tricky period, with targeted discounts and resale and pre-loved products coming to the fore.

Oliver Vernon-Harcourt

Céline Fenech

The fall in energy and fuel prices in Q2 have in part compensated for the persistently high food prices that have continued to put pressures on consumers’ budgets. The net effect resulted in a decline in the share of essential expenditure this quarter and a significant increase in the non-essential categories compared to the previous quarter. According to our Q2 Tracker data, there was a fall in net spending on everyday categories such as utilities, grocery and transport, while the more discretionary categories such as travel, socialising and clothing improved compared to Q1 2023.

Prices easing combined with unseasonably warm weather, as well as the king’s coronation, drove consumers to spend more on going out and on refreshing their wardrobe ahead of their summer holidays. Consumer spending in the consumer goods categories has proved particularly resilient despite some of the steepest price increases in many years. With commodity prices falling from record highs, consumer products companies have been under pressures to pass on some of the reduction in input costs to consumers. However, many large consumer products businesses are still on tighter margins than they were before the pandemic.

During the pandemic, consumer companies shifted their strategy towards Direct to Consumers (DTC) models including subscription services, not only to meet changing customer requirements but also because subscription pricing models offer more predictable and recurring revenue streams. Implementing a DTC model goes beyond just offering consumers an alternative, convenient option to shopping. DTC allows traditional brands to collect useful first-party data that in turn enables personalised customer experiences, direct relationships with consumers, strengthened brand loyalty and long-term growth. However, the DTC channel has not always been profitable. There are also challenges arising from the frequency of shipping as well as the direct impact on the brand of a poor delivery experience.

Once a year our survey measures consumers adoption levels of subscription services and the data shows that DTC services have continued to grow in the last year. In Q2 2023 there was an increase of three percentage points in the total percentage of consumers paying for delivery passes (48%) compared with the same period in 2022 (45%). The number of consumers paying for subscription boxes was also up by two percentage points to 18% in Q2 2023 compared with12 months prior.

Our research also shows that in Q2 2023 of those paying for a subscription or delivery pass, nearly two-thirds (63%) paid for one subscription and/or delivery pass service, while 35% paid for two subscriptions or more, compared with 67% and 31% in Q2 2022 respectively. These results suggests that despite a year that saw inflation rising to record highs and people reconsidering their spending habits, consumers have continued to see value in paying for subscriptions or delivery passes.

Improved consumer confidence could suggest a potential upturn in the consumer products sector, but many have warned consumer moods remain fragile. With inflationary pressures expected to continue easing, our data shows that consumers intend to spend less on day-to-day categories, such as groceries, utilities and transport in Q3 2023. However, the expected uptick that should follow in non-essential categories might not materialise as consumers intend to spend less across all discretionary categories, except for socialising categories such as going out and eating in restaurants.

Consumer products companies, like many other businesses in the consumer economy, continue to focus on having to spend more to re-engage with consumers while at the same time trying to increase productivity and protect margins. However, with inflation starting to ease, substantial price hikes become harder to justify, making staying profitable a challenge. The changing economic climate may present opportunities for consumer products businesses to optimise revenue growth management (RGM) systems to manage prices, promotions and channels better. For instance, inflation easing could allow more experimenting with pricing without significant risk, such as introducing a new premium tier or altering pack sizes to offer better perceived value. Despite macroeconomic headwinds and contracting consumer demand, consumer products companies have an array of options to protect their market share and profit performance while still delivering benefits to consumers and trade partners.

Craig Turnbull

Céline Fenech

For the second consecutive quarter, the Deloitte Consumer Tracker saw net spending in the leisure sector improve from -12.8% in Q1 2023 to -11.0% in Q2 2023. The upward trend points to consumers relaxing their recessionary behaviour due to a combination of salary increases, warmer weather and pent-up demand for travel. Despite rising ticket prices, consumers seem to be prioritising spending on holidays above other discretionary expenses, particularly after years of pandemic travel restrictions, which has supported a recovery in the travel sector. A leading travel company has seen a pick-up in demand for package holidays as consumers are opting for certainty in spending in the midst of a cost of living crisis.¹ The all-inclusive package holiday has remained a resilient and popular product, despite the pressure on disposable incomes from inflation and rising interest rates.

According to the Deloitte Consumer Tracker, leisure net spending rose in 6 of the 11 categories in Q2 2023 compared with the previous quarter. The most notable increase was in the long and short holiday categories, with a 7.1 and 6.3 percentage point increase, respectively. These results can be attributed to pent-up demand and higher savings post-COVID, coupled with long periods of not being able to visit friends and family. This ‘revenge’ travel has supported the recovery of the sector, with people keen to resume travelling, especially for leisure purposes. However, the trend is for shorter trips. According to the Deloitte Travel Weekly Insight Report 2022-23, three in five consumers were planning to reduce the number of nights away on holiday. Further evidence has been provided by a recent earnings update from a popular travel operator which highlighted that consumers have booked briefer getaways this summer, with the average trip lasting seven days, down from nine for the same period last year. The prioritisation of travel over other discretionary categories is evidence that built-up demand still exists in the market, but with higher mortgage rates and increases in prices across the economy demand for travel may not continue at the same pace after the summer.

Warmer weather and multiple bank holidays in Q2 2023 have contributed to a slight increase in net spending on eating out and drinking at pubs/bars, with a 3.6 and 3.9 percentage point increase, respectively, in Q2. However, customers are making careful choices about when to splash out. Train strikes, the working from home culture and multiple bank holidays have negatively impacted the hospitality sector. Rail strikes have hurt the night-time economy which is dependent on commuters and public transport. In addition, the work from home model means that many people no longer need to buy lunch during the week, and the quieter period following a busy bank holiday weekend further adds to the decline in business. Concerns over labour shortage, rising input costs and fear of higher fuel bills in the next quarter persist among restaurateurs and hospitality business owners. Indeed, several well-known restaurant chains have announced plans to close sites across the UK.

Our data shows that compared to the same period a year ago, the categories where consumers have cut back slightly on balance include going to the gym or playing sports, betting and gaming, and attending live sports events. However, compared to Q1 2023, consumers have cut back the most on betting and gaming, drinking in coffee shops/ sandwich shops and in-home leisure.

The leisure and hospitality sector has been particularly exposed to high inflation given that it is energy intensive, food intensive and people intensive, and relies heavily on the resilience of the UK consumer. Many businesses have increased their prices to offset rising costs and protect profit margins. Some businesses have been shrinking their offering by reducing menu sizes, demanding deposits or even pre-payment for a meal, and making savings wherever possible. The hospitality sector will have to manage high input costs – all the while wondering if robust consumer demand can continue to hold, as rising mortgage rates eat further into consumers’ disposable income.

Our data points to consumers tightening their purse strings with spending intentions in leisure categories for Q3 2023 down across 9 of the 11 categories compared with spending intentions made in Q1 2023. After the busy summer with school holidays and getaways, consumers are more likely to cut back on their discretionary spending as they make careful choices. Demand in peak trading periods, for example, the summer and winter holidays, has remained strong, but at the cost of weakening demand in the off-peak periods. During Q3 2023, the price-sensitive consumer will cut back on eating out and drinking at pubs and will more likely shift towards in-home leisure activities, enabling them to save up for the next holiday season.

The second half of the year is likely to be more challenging as higher interest rates will negatively impact the share of disposable income, which means less money to spend on leisure. The mid-market restaurant chains and businesses are likely to be more impacted as they are still having to deal with rising costs, squeezed profit margins and much softer consumer demand.

Encouragingly for the fitness and wellbeing industry, our data suggests that consumers intend to spend more on going to the gym or playing sports as they are reluctant to move away from the health trends begun during the pandemic.

For most businesses in the leisure sector, growing or even maintaining margins will continue to be a challenge this year, given the inflationary environment and a more price-sensitive consumer. As a result, businesses will find it difficult to balance the need to invest in potential growth opportunities with having to renew their focus on increasing profitability including finding efficiencies from within the business. In the travel and hospitality sector in general as well as individual organisations, there is likely to be more consolidation and rationalisation including simplifying business operations and offerings. Businesses will also be looking to maximise the opportunity to convert some assets into cash, for example by capitalising on their property as an asset. Initiatives aimed at improving profitability will be key at a time when expansion opportunities could be limited.

[1] UK's Jet2 says cost of living crisis lifts demand for package holidays | Reuters