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Update on the consumer products sector

The Deloitte Consumer Tracker Q1 2022

Consumer confidence fell for the third consecutive quarter in Q1 2022. Inflation increased at a faster rate than earnings, interest rates also rose and, combined with the impact of the pandemic and the Russian invasion of Ukraine, led to a significant deterioration of consumer confidence. The Deloitte Consumer Confidence Index* declined by five percentage points to -17% compared to Q4 2021 representing our Tracker’s largest fall since Q1 2020 when the UK entered its first lockdown at the start of the pandemic.

Surging inflation dictates consumer spending

Surging inflation and the removal of all COVID-19 restrictions both played a role in driving an increase in consumer spending this quarter. According to our Tracker, in Q1 2022 net spending on grocery grew by 8 percentage points compared with Q4 2021 and was 26 percentage points higher than a year ago. Net spending on alcohol and tobacco saw a nine percentage point decline compared with Q4 2021 as the lifting of all remaining COVID restrictions allowed consumers to spend more on going out and socialising. This is reflected in spending growth in the on-trade categories, with net consumer spending in the restaurant and going out categories up by nine and five percentage points, respectively, in Q1 2022 compared with Q4 2021.

However, there was a notable decline in spending in other discretionary categories this quarter compared with last quarter. In fact, consumers had a negative net spend in household appliances (-2 percentage points), electronics (-2 points), furniture and homeware (-3 points), and clothing and footwear (-6 points) this quarter compared with Q4 2021. Some of this decline in spending can be attributed to seasonality, with consumers spending more on discretionary goods in the run up to Christmas. However, some of the decline must also be attributed to the financial pressures that are causing a squeeze on the cost of living. Among consumers who spent less this quarter, 54% reported buying fewer items in an effort to save money while 35% reported choosing cheaper brands.


Update on the subscription model

During the pandemic, consumer companies have steered their strategy towards Direct to Consumers (DTC) models to meet changing customer requirements. 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. Launching a DTC model could increase pressure to reach consumers faster and at no or low delivery cost. There are also challenges arising from the frequency of shipping as well as the direct impact of a poor delivery experience on the brand. In addition, consumers could prefer buying from one central marketplace location which might offer a delivery pass subscription and faster shipping. As a result, businesses have turned to offering a hybrid model of in-store and online shopping.

During the pandemic many consumers were tempted by the convenience of DTC, but in a sign that adoption of DTC services might be reaching a plateau, our data shows that in Q1 2022 there was little change in the total percentage of consumers paying for delivery passes (43%) compared with the same period in 2021 (44%). The number of consumers paying for subscription boxes was down by one percentage point to 19% in Q1 compared with Q1 2021.


Our research also shows that in Q1 2022 of those paying for a subscription or delivery pass, two-thirds (65%) paid for one subscription and/or delivery pass service, while 34% paid for two subscriptions or more, compared with 38% in Q1 2021.

The consistency of these results suggests that consumers who subscribed to a service during the lockdown still want to continue the service despite the economy reopening. Longer term, with inflation rising at a much faster rate than wages, consumers may be forced to weigh the cost of multiple subscriptions or delivery passes against their ability to buy essential items.


Outlook

Despite a five-percentage point decline in consumer confidence this quarter, consumer spending shows no sign of slowing down. Net spending intentions on grocery, and alcohol and tobacco over the next three months are 28 and 15 percentage points higher than last quarter, respectively. Meanwhile net spending intentions on going out and restaurants are seven and eight percentage points higher than last quarter. Consumers also expect to spend more on health and beauty next quarter (plus four percentage points).

Much of this increase in consumer spending will be driven by inflation. Rising costs of inputs, packaging, labour and transport mean that prices will continue to rise in the consumer products sector. While some companies will make significant investments to keep prices down, others simply will not be able absorb the rising costs and must pass some of the increases on to the consumer.

The willingness of consumers to accept higher prices will almost certainly be determined by their financial situation. In dealing with rising prices, some consumers will seek out more premium goods to justify the increase in spending, while others will be able to draw on any savings made during the pandemic or rely on equity and available loans associated with record house prices and relatively low interest rates. However, some consumers will not have the same level of financial resilience and will have to cut back on the volume of goods they buy, trade down to own label products and to goods at lower prices, or even switch to the more value retailers. One way for consumer businesses to mitigate against this risk would be to offer a wide range of premium and value products under the same brand – so that as prices go up (or consumer financial viability goes down), they have more opportunity to retain the consumer.  




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*Deloitte’s overall confidence index is the aggregate of six individual measures: levels of disposable income, levels of debt, job security, job opportunities and career progression, children’s education and welfare, and general health and wellbeing.

The Deloitte Consumer Tracker Q1 2022

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