The UK remains in the throes of a cost-of-living crisis. According to new research from the business consultancy Retail Economics, the mix of rising fuel prices, energy bills, mortgage rates and food, have contributed to households having around £3bn less to spend this Christmas, compared with last year.
This is already beginning to bite. Data from the Office for National Statistics shows retail sales volumes fell by 0.9% in September, compared with the previous year. Mild weather was partly to blame, but so was consumers cutting back on non-essential spending.
The reality is that consumers are not feeling optimistic either about their own financial prospects or those of the wider economy. GfK’s monthly barometer shows consumer confidence dropped by nine points to -30 this month. People’s confidence in their own financial situation over the next 12 months dropped six points to -8, while their confidence in the national economy dropped eight points to -32.
This is feeding through to Christmas spending. Customers are starting shopping earlier in an attempt to spread costs. Marks & Spencer, for example, says 50% of shoppers have already started preparing for the festive period and it has experienced a 22% increase in Christmas food orders compared with a year ago
The risk of over-discounting
What, then, should businesses – particularly those that rely on this period for their annual profits – be doing? One strategy is to cut prices and up promotional offers in an attempt to boost sales.
But GfK’s client strategy director Joe Staton believes companies should resist the “historical temptation” to immediately lower prices. “It risks undermining brand equity,” he explains and can often be self-defeating if they mean stock is sold at a loss.
Apple never does sales. There’s a lesson in that
Instead, he suggests, firms should focus on achieving value over volume. “If you start to sell your product for a much cheaper price, you risk the perception of that product changing,” he says.
Indeed, as M&C Saatchi’s chief strategy officer Sophie Lewis quips: “Apple never does sales. There’s a lesson in that.”
That doesn’t mean businesses shouldn’t use promotions as a sales driver, but that price cuts are not always the answer. There are other levers to pull, for example offering extended warranties, free gifts or vouchers for future spending. And Jeremy Stern, the chief executive of branding agency PromoVeritas, says companies should also be wary of taking a one-size-fits-all approach that could see money left on the table.
“Companies need to have some segmentation in their market research. If you go in too heavily on discounts, you actually risk missing out on the income from some consumers who may have been able or willing to spend the full price,” he says.
The importance of positive messaging
Although consumer confidence might generally be low, Stern argues, the usual underlying sentiment about Christmas endures. Indeed, while GfK’s barometer shows the numbers are strongly negative, they are better than last year when the score was -47.
And last year, sales (excluding fuel) in the three months to the end of December increased 3.6% as price increases offset volume sales that declined by 6%.
Consumers, however, have now been living through more than a year of high inflation, while mortgage increases are being felt by more people. There is also war in the Middle East and Ukraine, as well as ongoing concerns around climate change making many anxious and concerned for the future.
Amid that, it’s important businesses remember that people want to celebrate Christmas and will likely see it as an opportunity to put this year behind them and hope for a better 2024.
“For advertisers and marketers, it’s important that Christmas is presented as a time of joy,” says Stern. “For every cloud, there is a silver lining and it’s vital that businesses tap into that sentiment.”
Staton agrees, advising companies to focus on a more positive message in their advertisements and promotions, as well as showing how they are helping consumers navigate a tricky economic situation. Trying to focus on value will also be key, he says, pointing to Asda’s recent ‘taste test’ campaign, which invited customers to try and tell the difference between its products and those of luxury food retailers such as Harrods and Fortnum & Mason.
“What Asda did was very clever,” he reflects. “Rather than bang on about 49p sprouts, they framed their 1.99 chocolate as ‘as good as anything you’d find in Fortnum’. And if people can’t tell the difference, that’s a real positive for them, to be grouped in with those top-quality brands.”
Rewarding and incentivising customers
Although he may advise companies against lowering their prices, Staton does not diminish the challenges of the cost-of-living crisis, nor dispute the need for firms to “justify” the amounts they are asking people to pay.
“If you’re going to ask someone to pay a lot of money [for an electronic device, for example], then you’ve got to think about what you can offer them for that price… Can you offer free installation or free delivery? Can you offer a long-term guarantee or insurance?”
As consumers become increasingly conscious about their electricity bills, he adds, firms which stock more sustainable and energy-efficient products are more likely to appeal. “If someone is looking at where to buy a major domestic appliance, [energy efficiency] might well factor in,” he says. “They’re not just thinking about the upfront cost, they’re thinking about the long term.”
For Stern, one way of making a greater number of products more accessible to a wider range of consumers without compromising on cost is to use hire-purchase schemes. “I can see more companies adopting a Klarna-style model,” he says. “Interest-free credit will be a big thing, but you’ve got to be careful that you don’t encourage people to get into debt. The payment plan has got to be thought out carefully.”
Stern also feels it is important for companies to reward loyal customers. In the lead-up to Christmas, retailers that operate a membership scheme could be at an advantage if they offer spending incentives. A prize draw, he suggests, “could boost consumer engagement.”
A difficult but not impossible Christmas
Ultimately, the cost-of-doing-business-crisis and the cost-of-living crisis run in tandem. For Lewis, “quality, rather than quantity” is the watchword for both companies and consumers alike in 2023.
And, against the backdrop of low consumer confidence, the most successful companies will be the ones that adopt a long-term strategy, rather than indulging in short-term, gimmicky flash sales.
