By Nick Dibden on 16/12/2022
Nick Dibden, co-head of consumer industries, discusses the unprecedented volatility that consumer-facing businesses are facing with the ongoing cost-of-living crisis
2022 has been a year of extreme volatility for businesses of all kinds, but for none more so than consumer-facing companies contending with the ongoing cost-of-living crisis. This squeeze on consumers has seen real wages fall for the six consecutive months to October as rising inflation resulted in real pay falling by 2.7 per cent year on year. The repercussions of this have undoubtedly impacted the food and retail sectors. We saw a change in the long-established order of the grocers, with Aldi overtaking Morrisons for the first time as shoppers sought out better value, and of course there has been the well-publicised demise of a number of leading retail brands.
As one of our clients recently said to us “Anyone who tells you they know what next year will be like is lying!” However, looking ahead to 2023, inflation will continue to challenge the market. Recent commentary that it may have peaked might sound positive, but it still remains at 40-year highs and continues to inflict pain on cash-strapped households. Meanwhile, geopolitical tensions, specifically the ongoing war in Ukraine, continue to disrupt supply chains around the globe and have created an energy crisis that will continue to be a major concern for companies and their management teams.
Companies have absorbed some of these increased costs but some inevitably have been passed on to the consumers, and this level of pass-through will accelerate in 2023.. As consumers face into an environment of sustained rising prices, they will be forced even further into a change in their habits.
We witnessed how money can shift between channels during Covid and we expect the share of wallet, when it comes to food, to return to in-home consumption once again in 2023. Brands will have to work even harder to remain attractive to consumers and, while higher income households may be less impacted by economic pressures – and, we expect, will continue to shop for luxury goods, as per previous downturns – lower income households will need to cut back, or even eliminate, their discretionary spend. In the face of this, it will be more important than ever for companies to stay relevant and for management teams to obsess about the customer and their experience.
The way companies communicate about issues will be ever more important to consumers. Even the most upbeat management teams are cognisant that there could be another 12 months of pain ahead. Cconsequently, newsflow is thinning and management teams, reining in their guidance as the unknown increases. At the same time corporates are trying to navigate the increased scrutiny of the impact their business and industry is having on the climate crisis. Management teams will need to be particularly vigilant about how they communicate on their sustainability-related achievements to ensure they are not at risk of being labelled with “greenwashing” and that their goals and initiatives are credible. Any hint of misrepresentation and consumers could turn on them causing serious reputational worries.
While we would like to have an optimistic outlook heading into the New Year, we don’t expect the first half to be much different to how 2022 closes out. In all probability it will be worse. The squeeze on consumer spend will likely harden and discretionary spend will become even more selective. Resilient categories in the grocery world should come under lower pressure than their less essential counterparts, but it is almost inevitable that further increases in downtrading will occur across the consumer landscape.
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