At the halfway point of the year it seems appropriate to examine the wider economic picture, review consumer spending insights, and take stock of the likely implications for the out of home sector. MCA’s market insight director Steve Gotham shares his thoughts.
At the halfway point of the year it seems appropriate to examine the wider economic picture, review consumer spending insights, and take stock of the likely implications for the out of home sector.
Most recently, the British Chambers of Commerce, via its authoritative survey of private sector business sentiment, reported that underlying economic conditions remain ‘decidedly downbeat’, as the intensifying uncertainty over Brexit, rising costs of doing business and a sluggish global economy combine to suppress growth. Their conclusion, that business decision-making and investment will be in limbo until at least the October 31st Brexit deadline, rather puts the responsibility for economic growth in the court of consumers. Unfortunately, the extent of stimulus from consumers opening their wallets is likely to be limited too.
Last month, the EY Item Club released a special report on Consumer Spending with the distilled key finding that growth would be at best, ‘insipid’. Following consumer spending growth slowing to a six-year low of 1.8% last year, it is expected to struggle to recover this year with a rise of just 1.6% and only 1.7% in 2020. The main reasons behind this weakness are from anticipated deterioration in the strength of the two key inputs: consumers’ purchasing power and the labour market. Purchasing power in the latter part of 2018 was boosted by the combination of improving earnings growth and inflation easing back. While inflation is forecast to remain muted over the remainder of the year, wage growth and employment levels are expected to be impacted by faltering business confidence and the lacklustre economic outlook and ongoing Brexit uncertainties.
Having touched on weakening business confidence, it is also worthwhile assessing data on the confidence of consumers. The best source of this is the GfK consumer confidence tracker, which averaged -10 over 2018 – continuing a weakening trend from -9 in 2017, -4 in 2016 and the buoyant +4 in 2015. Unfortunately, the latest result of -13 for June does little to suggest this downwards trend is going to abate anytime soon.
Moreover, while previously the overall weakness has been more to do with concerns over the wider economy, the latest June data highlights growing uncertainty about the robustness of personal finances.
Weakening mindsets on the robustness of consumers’ personal finances inevitably impacts sales of big-ticket items, and we are already seeing this in areas such as lower new car sales volumes. It might be expected, however, that spending on smaller, more experiential and more modest treat purchases would remain more robust. Unfortunately, according to the Office for National Statistics, UK restaurants, cafés and canteens had a tough time in Q1 2019, with a negative contribution to the overall weak rise of just 0.6% in inflation adjusted, total household expenditure.
This weakness is also evident in the falling consumer visit frequency trends we have seen on MCA’s Eating Out Panel. The Panel data also includes some forward-looking pointers on consumers eating out intentions over the next 12 months. At least here, when comparing reads from Q1 2019 with the previous year, there is no significant change evident in the proportion of adults looking to cut back, compared with those indicating either an increase or no change in their existing eating out behaviour.
So how best to conclude? It certainly seems as if we are in for a period of slow and low economic growth. The best, and only, positive that can be drawn from all of this is that leading economists are predicting a relatively stable outlook for the next couple of years. That said, given the huge Brexit uncertainties, there has to be more risk on the downside, rather than the upside. For stakeholders across the out of home market, rigorous scrutiny of costs and securing efficiency gains remain essential. The challenge, of course, lies in finding more and cleverer ways to do this that do not detract from the end-consumer experience.
Just maybe, encouraging teams to put on a show, pump up the volume, and hand out a few more random acts of kindness, might just become increasingly important.