Whether the UK goes into recession or not is kind of a red herring given that the challenges facing retailers this year are real, significant and won’t go away by themselves – retail has its work cut out.

Richard Lim, CEO of Retail Economics opened this year’s Delivery Conference and laid out the true picture of what is coming, by sharing insights from latest the Ecommerce Delivery Benchmark 2023 Report developed in conjunction with Metapack, which analysed data from 8,000 consumers and 700 merchants across 8 key international markets.

 The report sought to uncover the impact of a recession on consumer buying behaviours. According to the study 57% of consumers said inflation is their biggest concern currently. With food inflation currently running at 16%, coupled with high energy, mortgage and services prices, disposable income is squeezed. Only the most affluent household could expect to see a small rise in terms of their spending power.

Lim added that the sources of inflation are staple products, which disproportionately affect the least affluent households; spare cash has fallen by 10% compared to last year, a decline of £40 – £50 a month on what they have to spend on discretionary items.

The importance of the current argument over whether the UK will fall into recession or not cannot disguise the fact that costs will continue to rise, not least since the Bank of England just raised interest rates again, to 4%. All in all 3.6 m households will be affected by interest rates, something that only really benefits the rentier class.

And so, recessionary behaviours have already emerged and will persist throughout the year. The research reveals four key consumer groups :

• 41% of consumers are classified as Necessity Shoppers – genuinely financially distressed, cutting back on spending across most areas of discretionary spending, focussing on essentials focusing on needs over wants
• 22% are Postponers – households do have financial means but are looking to try and postpone or delay the replacement of products, particularly big ticket items
• 10% are Value Hunters – consumers that want to continue to purchase but are more likely to switch down to cheaper alternatives to make budgets stretch, and who will switch across shopping channels, both in store and online to get the best value, creating complex shopping journeys
• 27% are Carry on spenders – the cost of living crisis has not affected this group.

All of these groups represent both an opportunity and a threat to retailers so it is worth looking to the opportunities; the top 20% of affluent households are responsible for 40% of total consumer spending, so this makes them a key group for retailers to recognise and leverage relationships with, as they are better protected from financial pressures. In fact, the Bank of England estimates that we are sitting on top of £150 billion additional savings as a result of the pandemic, and these savings are with this group.

The research went on to show how these changed behaviours would affect individual categories. Consumers will not cut back on Health and Beauty and toys as well are typically protected is recessionary times. However, consumers said they would be cutting back on buying furniture, flooring and electrical items over the coming year. Some of these areas are typically more price sensitive, so they are the first areas that consumers will cut back on when they feel their finances are under pressure.

As a result, UK inflation in non-food retail will increase by 7.5% this year, while volumes will fall by 4.9%. Another way to say this is, consumers will pay more and get less as 80% of retailer say they expect to push through price increases to customers over this next twelve months and 40% say that rising costs are the most significant challenges to their business.

According to the research we will see a cost conscious consumer evolve this year. When consumers were asked about the most important factors relating to delivery, cost was rated highest, displacing convenience and speed compared last year’s study.

In addition, consumers are more aware of what they are consuming and what this means to sustainability. They are therefore interested in greener delivery options but at the same time they remain impatient to get their stuff. There has been a big shift to ‘out of home’ delivery in exchange for lower carbon emissions.

The result of all these factors is retailers are really feeling profitability under pressure – margins across the industry have halved over the last eight years with pre-tax profits falling from on average from 8% to 4%. Retailers are therefore trying to tread a difficult line between profitability and still giving good customer service.

Lim laid out five key areas to focus on for retailers to protect profitability :

• Redefine the value proposition and invest in price
• Consolidate to accumulate
• Create margin headroom
• Supply chain strategy
• New markets and technologies.