Effects of Financial Crisis on Consumer Spending in UK

Effects of Financial Crisis on Consumer SpendingPresence of world’s leading retailers such as Tesco, Sainsbury’s and Marks & Spenser, fierce competition in pricing and in other terms and difficulties of market entry are the main characteristics of UK retail industry. Despite such complexities, some retailers could manage to do better during the recession achieving even higher revenues and profits.

Although lack of financial resources and higher risk aversion by investors caused many difficulties for the retailers, some of the retailers introduced new strategies such as price cut downs and reinforcing their current positions rather than expanding, which helped them sustain the temporary difficulties and overcome the recession.

Two types of factors, direct and indirect impacts of recent financial recession on consumer spending during and after crisis have been discussed in the report of Office for National Statistics. Direct impacts are said to be uncertainty of income and high rates of unemployment with scarcity of finance to support public spending by the governments. Indirect impacts on the other hand are credit crunch of financial organizations which makes them unable to process their businesses of providing loans the businesses.

The research by Burt et al (2009) analyse and examine the impacts of financial crisis on the consumer buying behaviour in the UK and lists the following factors that had direct impact on the consumer spending: job uncertainty, declining savings, increased risk aversion and lower disposable income. Due to these factor consumers restrained themselves from excessive spending as they used to and focused mostly on important things. Respondents who participated in the study expressed their opinions saying that due to uncertainty in their future income or at least decline in the income they no longer can afford to spend excessively as previously.

As it has been stated earlier, disposable income is considered to be one of the main effects that was caused by financial crisis and it is usually believed to be inherent during the recession at all times. As disposable income declines, consumers are likely to consider their purchases well in advance and they are likely to discuss their choices with their friends and family. These factors indicate that they make their purchase only when they find it necessary to achieve buying efficiency. Therefore, Morris (2009) highlights the fact that disposable income is one of the driving factors during the recession that restricts the consumers from making their purchases in certain level.

Sales stood at still a relatively high level during the recession for some retailers due to various deals and promotions for customers. This is in some level due to increasing importance of increasing trend of online shoppers. Allen (2009) states that online shoppers’ trend saw significant increase during the recession of 2008. The author explains this with the fact that online shopping allowed consumers for more price comparisons and deals enabling them minimize their purchases than they would do in traditional store environment. The author further states that the retailers which offered more bargain deals and sales promotions performed better during the recession. For instance, Tesco focused on its discount offerings while Sainsbury’s and Asda introduced their own style, multi-buy and save offers.

However, findings of Vaitilingam (2009) seem to be contradicting to what have been stated above. According to the author, higher unemployment rates resulted in higher sales during the recession. People who are out of job tended to spend more time at home and therefore they have more time to spend doing shopping and they also were keen to create better conditions at home by purchasing latest home appliances. This can be seen in the increase in sales of a number of retailers in home appliances sector.

Along with the ‘state of pocket’ people were affected by another factor which is ‘state of mind’ during the recession. This is to say that excessive publications and news on TV programs delivered news about the impacts of financial recession which consequently discouraging people from spending their money. These effects of the crisis were due to wide range of articles in the newspapers and media during the recession time. According to one of the authors of such article, Ayling (Guardian, April 7, 2011), sales of luxury retailers were declining continuously due to the

Another impact of the recession was that due to decline in consumer spending, people switched from luxury stores such as Marks and Spenser or Waitrose to value stores such as Sainsbury’s or Tesco. Therefore, Bailtoult (2008) states that some of the retailers such as Sainsbury’s or Tesco experienced increase in sales thus resulting in better performance while other expensive stores los part of their market shares during the recession.

Another research which reviewed the consequences of financial crisis on the performance of the retailers has been carried out by Bowmer (2011). According to the findings of the author, financial crises have more effects on the performances of the of the luxury stores by decline in sales and loss of market share. The author further recommends that these stores need to invest more on advertising and promotions in order to reinforce their market positions and improve their brand awareness. Although it is obvious that retail companies are short of finance during the recession, it is highly recommended that investing in wise marketing campaigns and advertising can be effective in keeping the sales steady and even increase it.

The research which supported the above stated argument carried out by McKenzie and Schargrodsky (2011). The authors examined and analyzed the performance of food and non-food stores during the crisis. According to their findings, sales in food stores declined by 5.6% while in non-food stores rose by 4.5% during the recession. This was explained by the authors stating that it was due to high commodity prices for foods and lower price cut downs for household goods.

Findings of Altay (2008) show there was a switching rend by consumers from luxury and premium goods towards value stores. Limited income due to higher levels of unemployment resulted in reduced consumer spending. This is was one of the factors that resulted in decline of sales of luxury goods. However, consumers were highly attracted by the promotions offered by the value stores. Although this is a good fact that sales volume related only to the discounts increased by 50% during the recession time, however, the author expresses concerns that offering high discounts can be dangerous for manufacturers as well as for retailers as actually they do not keep high margins due to high levels of competition.

 

References 

Altay T (2008). The impact of the recession on value and premium goods, IRI, UK

Ayling J (2011) Retail Recession: looms for UK high street.

Bowmer R (2011), The effects of Recession on Brand Loyalty and ‘Buy Down’ Behavior: 2011 Update.

Burt S, Sparks L, Yeller C, (2009), Retailing in the United Kingdom-a synopsis.

Mckenzie, D and Schargrodsky, E. (2011). Buying Less but Shopping More: The Use of Nonmarket Labor during a Crisis. Economia. 11 (2).

Vaitilingam R (2009) Recession Britain, findings from economic and social research, UK.