Reimagining opportunity in ‘the year of the squeeze’
Like everything else in the last few years, the economy has been keeping us on our toes.
The UK officially moved out of recession in 2021, following the biggest drop in annual GDP in 300 years. But this was a recession like no other… growing household savings and healthy employment rates bucked the pattern of previous downturns. All alongside the well-documented tectonic shifts in consumer behaviour.
And now, against a backdrop of economic recovery, 2022 has been dubbed ‘the year of the squeeze’ on household finances. We unpick some of the key drivers of these dynamics to form a view on which consumer sectors show opportunity, and which are likely to struggle.
A polarisation of spending power
We predict that 2022 will see polarisation in personal finances with lower and middle-income households feeling the effects of inflation and national insurance increases most acutely. Conversely, higher-income households, buoyed by high savings levels will be less impacted.
For many, the pinch is already being felt; 83% noticed price increases on their commonly purchased groceries or household essentials last year, and 90% plan to change shopping behaviours with further inflation. We expect shifts to lower priced brands, particularly for essential categories, as seen in the last recession when Aldi and Lidl made huge gains in market share as consumers traded down from premium brands.
Boosted by the tailwind
For middle and higher-income households, pent-up demand and high household savings will drive spend in certain sectors.
In discretionary categories, such as apparel and footwear, luxury brands should perform well. High-end propositions target those more insulated from economic headwinds and a return to work and play will fuel a renewed interest in wardrobe updates. Entry-level brands will also benefit as those feeling the squeeze will increasingly seek value.
Leisure and hospitality have been among the worst hit by lockdowns and logic may suggest that the squeeze on discretionary spend may further dampen performance moving forwards. But our view is that this may not unfold. On the demand side, where we have been starved of our social freedom, we expect to see consumers pivot from buying ‘stuff’ to prioritising spend on going out. On the supply side, where many businesses sadly did not pull through, there is opportunity for growth. We expect the shift towards the experience economy witnessed prior to Covid to resume.
Home improvement has been high on the agenda; anyone looking at improvement last year will know that tradespeople and materials have been in short supply. Demand in this sector shows no sign of slowing down. By the same token, sales of new cars were impacted by the global chip shortage, but as supply resumes and with healthy order backlogs, the sector is on-track to recover.
Pushing up hill
Conversely, we predict that some of the lockdown winners will not be able to maintain their like-for-likes. We are already seeing this unfold with the diminishing demand for Netflix subscriptions and Peloton bikes. The technology sector may also be in for a tough time, as consumer investment in connectivity, home working and entertainment, brought forward during Covid, wanes this year.
Global tourism, which has been inevitably suppressed, has historically been a recession-proof sector. Lockdown frustrated many consumers travel plans in 2021 leading to pent-up demand. That said, a level of caution remains, and we foresee that full recovery will be slow, with the size of the sector predicted to remain 30% below 2019 levels.
And across the board, for retail and brands, our view is that it will be the mid-market propositions that are most likely to struggle. Consumer polarisation means those brands without a strong value proposition or point of differentiation are likely to be overlooked.
Of course, within each of these sectors there will be brands who outperform. Some fundamental trends will cut through economic dynamics. Consumers are increasingly savvy in seeking out the brands that align with their own values, with sustainable and ethical products high on the agenda. And as consumers look to break free of their confines, it will be the products and services which offer a more immersive, emotional connection that will benefit.
As management teams and investors alike are grappling to understand what this means for business, we work to shed light on the changes at a macro level, reimagining the landscape, and working out how best to respond and adapt strategy for the future.
Do get in touch to chat more about how we can support your business opportunities.
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