When did spending become so difficult?
Consumers, retailers, and manfacturers are all essential parts of a successful economy. But it's not that simple.
By John Coll Published 19 October 2011
We need three things for a successful economy: consumers to buy, retailers to sell and manufacturers to make what they want - so far so simple. The difficult part is for retailers and manufacturers to produce unique and engaging brands that are desirable to the consumer. The 'Great Recession' has made this more difficult, with all three feeling the strain on their finances simultaneously and with similar pressures. Harder still, costs are increasing even as revenues plateau. So what exactly are these pressures, and do these economic pillars hold any optimism for the future?
Firstly consumers, dealing with increasing costs along with ever decreasing scope for higher salaries in their current jobs. Changing careers could provide a way out, but risk-averse workers prefer to stick with what they know unless forced to change by a redundancy, the sad reality for many. This week's IFS report suggests that middle earners should be most optimistic about the future, with incomes expected to rise slowly after 2013 - although it is projected that 2015 income levels will still be below where they were six years earlier. Recent research shows 61% of consumers are 'making ends meet' and a fifth of them see their finances as positively healthy. It's not just the employed either, with a full third of retirees saying their finances are in good order. The IFS report warns, however, that levels of poverty will worsen over the next two years.
Then we have the retailer, working tirelessly to befriend the consumer, offering breadth, value and convenience. Facing almost a 200% increase in distribution costs over last year, more than half down to drivers and volatile fuel prices, retailers are struggling to pass on their overheads to consumers, especially those championing low prices. The tactic of separating portfolio brands from their private own brands has proved successful, allowing consumers to buy 'value essentials' without compromising on quality and the retailers to continue posting profits. This type of smart strategising has increased consumer trust in retailers and the emotional connections they have with them. Alongside this, retailers are in the midst of rapid and aggressive expansion, planning new capacity, equivalent to the size of Sainsbury's today, over the next few years, albeit in smaller store formats. The economy has done nothing to slow down ambition amongst retailers.
Finally we have the manufacturer, diligently creating innovative products and promotions to entertain consumers. Commodities and raw materials have soared in price, due in part to wary investors buying these historically less volatile resources, cutting manufacturers margins and raising production costs. But whilst the West has been deep in the doldrums of recession, Asian demand is booming. As Asians become richer they increasingly adopt a more westernised diet, and waistline, matching our meat consumption. If middle-class Chinese adopt the carnivorous habits of Americans, they will consume 80% of the world's current meat production. In the future vegetarianism may not be a choice, but a necessity, as meat once again becomes a luxury. Does this qualify as a nudge strategy against obesity? But right now, manufacturers continue to rely on discovery, whether that is of unmet consumer needs or of new solutions to old problems; this has always provided their fuel for growth. Now sustainability is in vogue, with company R&D teams looking to create more and more efficient products, cool wash detergents for example, in their quest to protect the environment and the customer's wallet. These advances will add up to an awful lot of energy saved if consumers change their behaviour permanently.
We have been sheltered from these pressures on the economic cogs for many years, but the UK economy is still robust. Despite a temporary setback to our bank balances, most of us talk optimistically about a future of opportunities; of profitable solutions to current woes, and of a media that all too often accentuates the negative before eliminating the positive. Only through positive action and energy will our economies return to growth. In the meantime, the world's economic fuel will come from Asia, reaping profits now and growth in the future. Asia is not quite yet the world's economic engine, but its boom is keeping the world economy out of recession, and long may it do so.
John Coll is the director of Ipsos MORI
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5 comments
the article is good but does not adequately address UK competitivness in the global economy, we need to develop and nuture great companies that will be able to compete, we need to develop clusters, right now those clusters will develop in china and india if we carry on sleep walking. we need more high tech engineers/designers for the future economy, how can we be the number one destination for global start-ups? in high tech materials, electronics, computing, green energy etc ? how can we be energy self-sufficient in a life time?
Ok Matt. Is it the fact that house prices are still very high, even after a huge financial crisis? Tell me what chance someone in a low paid job has of buying their own family home these days?
Prop up, I keep hearing that gag, yet the facts tell me a different story.
Spending is always easy, stupid!
It is earning that's difficult. If you dont understand that spending is NOT the driver of the economy (something that a lowly cleaner understands intuitively) you shud not be writing economy articles.
People are simply in too much debt, largely as a result of housing costs. While we continue to prop up house prices and stoke inflation with all time low rates and QE etc, we will continue to be a debt ridden economy.
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