When KPMG/Ipsos Retail Think Tank (RTT) met in October, members agreed that consumer confidence measures do provide key insight into likely patterns of spending.
Consumer confidence indicators have long been used to gauge household spending intentions and retail sales, with the measures pivoting around the general theory that changes in consumer confidence are typically followed by corresponding changes in consumer spending. As Dr Tim Denison, Director of Retail Intelligence at Ipsos Retail Performance, summarised, the theory suggests that: “…if a consumer is more confident about the economic outlook and their personal circumstances, they will be inclined to spend more.”
When the KPMG/Ipsos Retail Think Tank (RTT) met in October, the members agreed that consumer confidence measures do provide key insight into likely patterns of spending. Jonathan De Mello, Head of Retail Consultancy at Harper Dennis Hobbs, highlighted the impact consumer spending has on the economy, whilst James Sawley, Head of Retail & Leisure at HSBC, reinforced this further by flagging that the consumer has been the driving force behind the UK’s recent economic recovery.
However, as the UK assesses the impact of the EU referendum result on the economy, many members of the RTT noted that, more recently, there has been little to no correlation between the indicators and actual retail sales. Martin Newman, CEO of Practicology, highlighted that news headlines such as “Consumer confidence slows as job security fears surface” and “Consumer confidence up in September as shoppers shrug off Brexit fears,” which have been reported within days of each other, seem to call into question the accuracy or interpretation of these measures.
With consumer confidence increasingly in the spotlight, the RTT explored whether it can in fact be accurately measured and whether it in fact acts as a driver to consumer spending.
Can it be accurately measured?
David McCorquodale, Partner at KPMG, highlighted that “measuring consumer confidence is an attempt to evaluate consumer mind-set and is not something that can be compared across other measures at an absolute level.” He added that “…what, when, how and in what context you ask [questions] will affect the absolute levels reported.”
Martin Hayward, Founder of Hayward Strategy and Futures, also stressed that there is “no such thing as the average shopper”. He noted that: “the unique demography [of shoppers] and the nature of goods sold means that there may be significant variances to the norm that can render the indicator of overall confidence less valid”.
The fundamental flaws of polling were also raised as a shortcoming of consumer confidence surveys. Maureen Hinton at Verdict Retail suggested that: “As we have seen with election polls, it’s hard to get an accurate picture of intended behaviour with surveys, and an isolated score can lead to false assumptions.” As a result, a number of the RTT noted that individual scores are far less relevant and, as Maureen Hinton highlighted, “a time series [which] does supply a trend...[and] can used to measure the direction of confidence and the impact it will have on spending” is far more insightful.
Going a step further, David McCorquodale provided some suggestions as to how the accuracy of the trend can be improved. He stressed that a representative sample, the frequency of the questioning and clear instruction on where on a scale to answer, all play vital role. If questioning is consistent, sent at the same time every period and weighted to match national representation for age, gender, socio-economic background and other factors, then a more accurate picture could be obtained.
James Knightley, Senior Economist at ING, pointed out that consumer surveys tend to ask questions relating to consumer perceptions after events have already taken place. As such, he stressed that economists consider consumer confidence indices to be ‘lagging indicators’ that in themselves do not provide new information, but rather reaffirm assumptions that have already been made. Dr Tim Denison also questioned “how relevant exactly are reflections of the past on future consumption prospects.” He stated that: “…we live in a ‘here and now’ world where 12 months yonder has increasingly less meaning or relevance to the way we live.” This suggests such indices are a helpful summary of the past but less accurate in providing an indication of how consumers might act in the future.
Keeping with the ‘here and now’, many of the RTT members also stressed the power the media has in shaping the outlook of consumers, perhaps skewing the actual levels of confidence consumers feel versus what they act upon. Nick Bubb, Retail Consultant, stated that if you: “ask the typical consumer what the general economic outlook is… they will repeat back what they’ve just heard in the media.” He added that: “what [consumers] say and what they do are very different”.
James Sawley, however, firmly believed that consumer confidence can be accurately measured, with research organisations having honed their methodologies over time to be more accurate. Like many of the RTT members, he pointed to the measure’s long-term positive correlation with retail sales, which - as David McCorquodale and Maureen Hinton suggested - paints a more accurate ‘picture’ of the direction of travel, whilst the individual scores themselves are less reliable and should be interpreted with caution.
Does it drive consumer spending?
Whilst many of the RTT members referred to the long-standing correlation between consumer confidence and spending over time, they also noted divergence between the data sets following shock events. Dr Tim Denison, along with other RTT members, pointed to the months that followed the Brexit vote as a prime example of this. As James Knightley stated: “Consumer and business confidence plunged in the wake of the referendum result, yet the economy performed fairly well”. In fact – as Martin Newman noted – many retailers reported that their sales have not been negatively impacted by the Brexit vote as yet. But why?
As highlighted when exploring the accuracy of consumer confidence measures, Mike Watkins, Head of Retailer and Business Insight at Neilsen UK, suggested that there can be a delay in the effect diminishing consumer confidence has on actual consumer spend. He pointed to research describing “…a six to nine months lag after a change in sentiment to a change in spend.” However local market conditions such as price competition or personal circumstances such as job security can have a bigger impact on how much and when consumers decide to shop. James Knightley further added that: “Swift government action… can [also] swiftly nullify immediate consumer reactions.”
Maureen Hinton also pointed out that while consumers may come to believe the economy overall is worsening, until it impacts them at an individual level they will continue to spend as normal. As an example, Martin Newman illustrated that for a home owner, rising property prices may lead to a more positive sentiment in general, with their spending positively impacted as a result. However, the opposite is true for someone saving for their first home - if house prices are rising it directly diminishes their disposable income because they would need to save more.
That said, Maureen Hinton also flagged that a continuous stream of bad news is likely to make consumers more cautious, with the result being self-fulfilling. This crucially links back to the issue of media reporting on consumer confidence and indirectly influencing the consumer mind-set when hitting the shops.
Separately, James Sawley highlighted that certain categories of goods are likely to perform better than others in a period of low consumer confidence. Whilst luxury and big-ticket items would likely experience a decline in such an environment, retailers: “…operating as ‘value leaders’ [would be] likely to see an uplift in sales as consumers trade down”. While this might be the case for domestic consumers, James Knightley argued that: “consumer confidence can’t take account of everything to do with consumer spending”, as an example he pointed to the recent boom in tourism as overseas visitors take advantage of the weaker pound. This therefore suggests that indicators should not be used to project consumer trends uniformly.
Finally, David McCorquodale shed more light on what wavering consumer confidence may mean for retailers themselves. He suggested that: “low consumer confidence affects markets as a whole and makes it tougher for specialists to prosper. Generalists win by skimming more markets and persuading those already in store to buy, whereas specialist operating in non-essential categories are easily avoided by cash strapped customers.” To curb diminishing sales, and perhaps even delay or negate the negative impact on consumer spending, he highlighted techniques used by retailers to cement purchase decisions, including free longer guarantees and even celebrity endorsement.
There was general consensus among the RTT members that consumer confidence indices are never going to tell the whole story. Confidence indicators do provide useful insights that can help reaffirm general assumptions but, as Jonathan De Mello surmised, given the fickle nature of human emotion, consumer confidence cannot be viewed in isolation and needs additional context to make it meaningful.
As raised by many of the RTT members, particular caution should be given to consumer confidence measures following ‘shock events’ such as the Brexit vote. Martin Newman flagged that given the unprecedented nature of EU referendum: “…consumers are likely to rely on gut feel [so, nothing] other than money through the tills and website checkouts [can] accurately measure [consumer spending]”.
The RTT also concluded that consumer confidence indicators and consumer spend are inextricably linked. Maureen Hinton described the spiral in which bad news leads to more cautious consumers and, “as consumer spending is a major contributor to GDP growth, so the economy contracts and consumers begin to see job losses, leading to further cutbacks” and effectively more bad news. This therefore suggests the confidence indicators do drive spending, but confidence is driven by the economy so the cycle becomes self-fulfilling.
Members of the RTT are:
Nick Bubb – Retail Consultant
Dr. Tim Denison – Ipsos Retail Performance
Martin Hayward – Hayward Strategy and Futures
James Knightley – ING
James Sawley - HSBC
David McCorquodale – KPMG
Maureen Hinton – Verdict Retail
Mike Watkins – Nielsen UK
Martin Newman – Practicology
Jonathan De Mello - Harper Dennis Hobbs
The intellectual property within the RTT is jointly owned by KPMG (www.kpmg.co.uk) and Ipsos Retail Performance.
First mentions of the Retail Think Tank should be as follows: the KPMG/Ipsos Retail Think Tank. The abbreviations Retail Think Tank and RTT are acceptable thereafter.
The RTT was founded by KPMG and Ipsos Retail Performance (formerly Synovate) in February 2006. It now meets quarterly to provide authoritative ‘thought leadership’ on matters affecting the retail industry. All outputs are consensual and arrived at by simple majority vote and moderated discussion. Quotes are individually credited. The Retail Think Tank has been created because it is widely accepted that there are so many mixed messages from different data sources that it is difficult to establish with any certainty the true health and status of the sector. The aim of the RTT is to provide the authoritative, credible and most trusted window on what is really happening in retail and to develop thought leadership on the key areas influencing the future of retailing in the UK. Its executive members have been rigorously selected from non-aligned disciplines to highlight issues, propose solutions, learn from the past, signpost the road ahead and put retail into its rightful context within the British social/economic matrix.
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