Brexit Briefings 3: Is Brexit Changing How Brits Shop?

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1 Brexit Briefings 3: Is Brexit Changing How Brits Shop? UK consumer confidence fell sharply in the wake of the country s decision to leave the EU, although it remains much higher than we saw in the recessionary years of 2008 and The biggest contributing element to overall consumer confidence is the outlook for economic growth over the next 12 months. And some 64% of consumers said they expect the decision to leave the EU to lead to short-term negative effects on the economy. Discretionary big-ticket categories such as electrical goods and DIY products, understandably, look to be first in line for consumers to cut back on, if they have to cut back at all. Consumer spending and retail sales data for June present a mixed picture. Barclaycard said consumer spending held up well in the week following the referendum, but the British Retail Consortium said there appeared to be an immediate negative impact on food retail in the days after the vote. The balance of data appears to indicate consumers are not panicking and cutting their spending, despite the negative headlines from survey firms. ANALYZING BREXIT S NEAR-TERM IMPACT ON RETAIL On June 23, the UK voted to leave the EU, sparking immediate shock effects in the global and UK economies and a period of upheaval in British politics. Our Brexit Briefings series of reports examine the effects of the UK s decision. This is the third in our series; the first considered the macroeconomic ramifications of the vote; the second looked at potential winners and losers in retail. In this report, we wrap up and analyze some of the first indicators of UK consumer behavior since the referendum. The report covers: 1

2 The consumer confidence levels recorded by ongoing surveys. What consumers told survey firms they expect the impact of the vote will be on their finances. What consumers told survey firms they expect to change in their shopping behavior. What the first consumer spending and retail sales data since the referendum tells us. We write this on the eve of the UK getting a new Prime Minister, despite previous expectations that it would be September or October before David Cameron ceded power to his replacement. The postreferendum scene is changing fast and adding much uncertainty to the outlook for the medium term. As one example, we write this on the eve of the UK getting a new Prime Minister, despite previous expectations that it would be September or October before David Cameron ceded power to his replacement. Once the UK has advised the EU of its intention to leave the union, the country will have up to two years to negotiate and complete the process. As a result, this report as with others in our series focuses on the near term, rather than after the UK s departure from the EU. CONSUMER CONFIDENCE TAKES A HIT The eight percentage point decrease in consumer confidence was the sharpest drop recorded since 1994 We begin by looking at the first surveys of consumer confidence that emerged since the referendum result was announced on June 24. Survey firm GfK publishes the UK s most-cited consumer confidence index. In its specially conducted postreferendum survey, it found a sudden decline in consumer sentiment. The company said the eight percentage point decrease was the sharpest drop it had recorded since

3 Figure 1. GfK s UK Consumer Confidence Index February March April May June Post Vote* (1.0) (1.0) (3.0) (9.0) *Fieldwork conducted June 30 July 5. Source: GfK The overall confidence index is comprised of responses to a series of indicators. The breakdown reveals the most negative sentiment is related to the prospects for the general economic situation over the next 12 months. Ahead of the referendum, the campaign to keep the UK within the EU, which included the UK Government, released many negative economic projections in the event of a leave vote; the campaign was so pessimistic it was dubbed project fear. It is hard to escape the conclusion this will have some effect on consumers outlook for the next 12 months. Figure 2. UK Consumer Confidence Index Breakdown by Elements Change, from June 2016 Post Vote* June 2016 June 2015 Overall Index Down 8 (9.0) (1.0) 7.0 Personal financial situation over last 12 months Down Personal financial situation over next 12 months Down General economic situation over last 12 months Down 6 (19.0) (13.0) 4.0 General economic situation over next 12 months Down 15 (29.0) (14.0) 4.0 Major purchase index Down 12 (3.0) *Fieldwork conducted June 30 July 5. Source: GfK Yet, the country was split. According to GfK data, three regions saw a net uplift in sentiment following the referendum result, while another three saw a decline. The shifts in confidence do not appear to reflect how regions voted. For instance, London voted 60/40 in favor of remaining in the EU yet it saw confidence increase after the UK opted to leave the EU. 3

4 Figure 3. UK Consumer Confidence Index Breakdown by region Post Vote June 2016 Change South (1) (2) 1 Midlands (12) (6) (6) North (15) (19) 4 Wales (8) (9) 1 Scotland (19) (11) (8) Northern Ireland (5) 2 (7) Source: GfK Rival consumer-survey firm, YouGov, conducts research on confidence daily. It noted the four days of uncertainty directly after the referendum result wiped out the gains made in sentiment over the preceding three years, and took it back to a level last seen in May Figure 4. YouGov/Cebr UK Consumer Confidence Index Consumer confidence levels remain well above their recessionary lows May June Post Vote* *June Source: YouGov However, the long run of data puts even this decline in context: consumer confidence levels remain well above their recessionary lows. 4

5 Figure 5. YouGov/Cebr UK Consumer Confidence Index: Long Run Source: YouGov CONSUMERS EXPECT TO BE IMPACTED A total of 61% expected the decision to impact negatively on the economy and their personal finances. In this section, we turn to the findings from surveys that asked British consumers about their perceptions of the effect of the decision to leave the EU on the UK s economy. First, we chart data from Retail Economics, which ran its survey in the 24 hours immediately following the announcement of the referendum result. This recorded a total of 61% of those surveyed expected the decision to impact negatively on the economy and their personal finances. Just under one-quarter thought the effect would be positive. 5

6 Figure 6. UK Consumers Expectations of Referendum s Impact "I am concerned about the future of the UK economy and I feel this will have a negasve impact on my personal finances" Strongly Agree Agree Neutral Disagree Strongly Disagree Source: Retail Economics Separate research by Nielsen found a very similar proportion 64% expect the referendum result to have a negative short-term impact on the British economy. The same survey found the economy is now British consumers most pressing concern, with 55% of respondents citing it as one of their top issues. Figure 7. UK Consumers Expectations of Referendum s Short-Term Impact on British Economy Research by Nielsen found a very similar proportion 64% expect the referendum result to have a negative short-term impact on the British economy Negamve Posimve Source: Nielsen WILL THIS CHANGE HOW THEY SHOP? Fully 67% expect grocery prices to go up as a result of the Brexit vote Consumer surveys show a high propensity to cut back. For instance, some 41% of people told Nielsen they plan to change their spending habits to save on household expenses, not least because they think prices will rise; fully 67% expect grocery prices to go up as a result of the Brexit vote. Among consumers who expect to cut back, the actions below were cited as popular ways to save money. These results imply the already hard-hit grocery and apparel sectors may bear the brunt of trading down. 6

7 Figure 8. Planned Ways to Save Money Among UK Consumers Who Plan to Change Their Shopping Habits (%) Switch to cheaper grocery brands Spend less on new clothes Cut down on takeaways Change supermarket 37 Buy more Brimsh groceries 31 Source: Nielsen However, data from Retail Economics survey suggests bigger-ticket discretionary categories will be hit first. In total, 58% of respondents surveyed agreed the Brexit decision will impact negatively on their discretionary purchases. Figure 9. UK Consumers Expectations of Referendum s Impact on Discretionary Spending (%) "I think the vote to leave the EU will have a negasve impact on my spending on non-essensal items" Big-ticket, discretionary categories would be the most popular purchase categories to be cut Strongly Agree Agree Neutral Disagree Strongly Disagree Source: Retail Economics 7

8 The same survey found food ranked very low on the list of categories shoppers would cut back on, if they were forced to make economies. Understandably, big-ticket, discretionary categories are the most popular purchase categories to be cut. Clothing once again looks vulnerable. Figure 10. Categories in Which Consumers Would Cut Back the Most, if They had to Cut Spending (%) Electricals 24 DIY and Gardening 16 Clothing and Footwear Homewares Furniture and Flooring 12 Food 10 Health and Beauty 9 Source: Retail Economics So Why the Difference in Survey Findings? Why does Nielsen suggest food spending could be hard hit and Retail Economics suggest it will be among the most immune categories? We think survey methodology is an issue, with some surveys presenting questions in a potentially leading manner. We think respondents are much more likely to agree with an apparently logical, readymade statement such as, I will switch to cheaper grocery brands, when faced with a limited group of statements from which to choose, than they are to actively pick out food 8

9 when presented with a whole range of discretionary and nondiscretionary categories they could cut back on instead. We tend to think snapshot surveys that ask consumers about their intentions should be taken with a pinch of salt, and trend data, such as those on consumer confidence, are more reliable as indicators of shoppers willingness to spend. Any downturn in spending is almost certain to hit discretionary categories the hardest. But, given the infrequency with which shoppers buy electrical goods, or DIY products or furniture, those looking to save money immediately will turn to everyday outgoings. Clothing looks to be a vulnerable category, too, and any cutbacks would follow a period of weakness for the category. Barclaycard said its data showed that consumer spending held up comparatively well in the week immediately following the result of the referendum, with total spending growing by 2.1% week over week. SPENDING TRENDS SO FAR We still have little consumer spending data for the period following the referendum result. The latest data from bodies that measure spending are for the whole of June; we remind readers the referendum result was announced on June 24. Barclaycard said its data showed consumer spending held up comparatively well in the week immediately following the result of the referendum; total spending grew by 2.1% week over week. Nor did Barclaycard note a slowdown in June as a whole whether before or after the vote. Year-over-year growth in total spending for the month was buoyant, at 3.6%, Barclaycard said. This was the same rate as in May. Figure 11. YoY % Change in Consumer Spending Recorded by Barclaycard April May June YoY % Source: Barclaycard Visa, however, painted a weaker picture of consumer spending. But, this weakness kicked in in May, well ahead of the referendum, let alone the surprise result. Visa offered no comment on the performance of spending in the period after the referendum. Figure 12. YoY % Change in Consumer Spending Recorded by Visa April May June YoY % Source: Visa The British Retail Consortium (BRC) noted a weakening in retail sales growth in June but modest 0.2% growth was nevertheless stronger than the flat 9

10 The BRC noted, "The surprise result of the referendum appeared to trigger an immediate drop in food and drink spending. performance recorded back in March and April. The BRC said retail sales slowed toward the end of June, but, It is too early to define this as a trend. The BRC did note the referendum result, appeared to trigger an immediate drop in food and drink spending, but that this may have been a, shortlived shock. Figure 13. YoY % Change in Retail Sales April* May** June*** YoY % *April **May ***May 28 July 2. Source: BRC The Office for National Statistics publishes its retail-sales figures for June on July 21. Consumers are not panicking, despite the dramatic headlines emerging from some surveys. So the early data is mixed and undramatic. We think this should reassure retailers and consumer-goods firms that there has been no immediate contraction in overall consumer spending. Consumers are not panicking, despite the dramatic headlines emerging from some surveys. WHAT CAN WE TAKE AWAY FROM THIS? In short, it is clear consumer confidence has taken a hit yet, even in spite of the numerous consumer surveys that have been undertaken, it looks like there has been no major negative reaction from shoppers. Here are our key takeaways: According to survey firms, an alarmingly high proportion of consumers are ready to cut their spending. However, we feel there tends to be a major difference between what consumers tell survey firms they may or will do, and what they actually do. In particular, we think some surveys present tempting statements that are easy for respondents to agree with, and which therefore exaggerate the extent to which shoppers are likely to economize. The decline in consumer confidence is certainly a cause for concern. This could lead to some short-term softening of demand, and retail data such as that from the BRC imply that some sectors may be experiencing this although cutbacks have not been recorded across the board. The weakening of sentiment is unsurprising given the volley of negative statistics Brits were bombarded with during the lead up to the referendum. They were warned of recession, falling house prices, higher shop prices, mass job losses, lower pensions, a weakened National Health service, a decade of uncertainty, and even world war should they vote for Brexit. In this context, and 10

11 coupled with the lack of certainty of the route to Brexit immediately following the referendum, a hit to consumer confidence is understandable. As we noted in our previous report on potential retail winners and losers, if shopper caution intensifies, we see trading down by middle-class shoppers and older shoppers as a near-term risk for some retailers. This means premium mass-market names with a more affluent customer base look potentially vulnerable. Big-ticket retailers such as do-it-yourself stores are likely to see subdued demand if house prices decline. Finally, in fashion, we expect any weakening of sentiment among middle-class, middle-aged and older shoppers would make life even tougher for well-established midmarket brick-and-mortar retailers. 11

12 Deborah Weinswig, CPA Managing Director Fung Global Retail & Technology New York: Hong Kong: China: John Mercer Senior Analyst HONG KONG: 10th Floor, LiFung Tower 888 Cheung Sha Wan Road, Kowloon Hong Kong Tel: LONDON: Marylebone Road London, NW1 6JQ United Kingdom Tel: 44 (0) NEW YORK: 1359 Broadway, 9 th Floor New York, NY Tel: FBICGROUP.COM 12