FOREWORD

The Rise Of The Most Demanding Consumer Ever

Welcome to our 13th annual Retail Review, our ‘golden quarter’ analysis of consumer shopping trends and retailer responses in the all important run up to Christmas and New Year.

The wettest summer on record has played havoc with retail trading. This year’s Christmas period will therefore test retailers’ ability to anticipate consumer expectations and to emerge as a New Year winner.

If the bad weather was not enough, the ‘global credit crunch’, as a result of lending decisions in the US, is now beginning to create consumer confusion in western economies and the UK in particular. Any impact from related UK lending decisions has yet to percolate into the economy. But one thing is clear consumer confidence has been stirred but whether or not it has been permanently shaken has yet to be determined.

The evolution of the UK consumer into a complex, unpredictable and empowered individual has challenged the retail industry. In the past five years, retailers have responded to demand for lower prices, convenience, improved product ranges and value for money. Whilst consumers have become more astute with higher expectations, as a nation on the move, with more money and less time, we are becoming ever more demanding and want services to be available any time, any way and any place. In fact, these changes and demands mean it is increasingly difficult to segment consumers into clearly defined profiles.

We have therefore moved from a nation of shopkeepers to a country of canny consumers.

The balance of power moved from brand manufacturers to retailers some time ago, but there is now a distinct balance of power shift towards consumers who are less willing to compromise, as better information and greater choice is allowing consumers to ‘vote with their feet’.

Christmas goes electric, as not only 93% of the population use digital technology such as mobile phones, two thirds also use the internet in some way over the Christmas period. Twice as many consumers compared with last year are opting for the convenience of the internet to do most of their Christmas gift shopping.

In addition, innovation and the affordability of new technologies have encouraged a stronger presence of ‘high tech’ items on consumers’ wish lists this Christmas.

The UK consumer is smart and sophisticated and during the festive season demonstrates different shopping behaviour than the rest of the year. In spite of the economic conditions, consistently during the ‘golden quarter’ there seems to be an underlying resilience to spend for Christmas and the New Year.

"…as a nation on the move, with more money and less time, we are becoming ever more demanding and want services to be available any time, any way and any place."

The influence of technology and the information age is now preponderant and mainstream and affects consumer habits. ‘You’ve got mail’ doesn’t mean the postman has made a delivery anymore. The language used by today’s consumer has changed and essential words unheard of amongst our parents generation didn’t exist or had different meanings such as Amazon, eBay, Google, Facebook, webcam, spam, Blackberry, Bluetooth, Skype, text, mobile, broadband, iPhone, PS3, Wii, HD, plasma and you can think of many more. All of these words are now part of our ‘digital dictionary’ and for generations X, Y and Z they drive their consumption habits.

For those people who are pining for the traditional high street of yesteryear with the butcher, baker and candlestick maker, our message is that the world has moved on. The UK consumer has moved on and retailers also need to evolve in order to survive in one of the most competitive retail landscapes in the world. So a multichannel marketing media strategy is a must for connecting with today’s sophisticated consumer.

In today’s retail environment it’s not about the big eating the small and a need for more regulation to contain them. It’s actually about the fast beating the slow and a consequent need for less regulation to allow the fleet of foot to flourish. Small retailers competing on price alone are on a path to failure. There are many examples of independent stores which, for example, offer local ‘farm assured’ produce, are thriving.

We have been getting a consistent message for the last thirteen years from UK consumers. Their number one requirement is convenience not price, and this year the message is even louder and clearer. Consumers take price, value for money and convenience as a given and want more than that as a part of their shopping experience. So ‘Retailing 101’ tells you to perfect these three things in the retail offer and give consumers more reasons to shop with you or face a murky and dismal set of New Year trading results.

We live in an affluent society and this is one of the reasons the UK is a magnet for migrants, but this also seems to make spending in the festive season resilient. This has enormous implications for shopping patterns and behaviours and ultimately the retail offer.

We believe that those predicting a dismal Christmas and New Year may be confused by the most recent economic indicators whereas what they should do is look at consumer behaviour and intentions. In our view 2008, is likely to be a tough year and we expect a repeat of the behaviour during Christmas 2005. Yes, it will be a good Christmas, that’s what retailers and more importantly consumers tell us. But February and March 2008 may require a new streamlining diet for retailers if they are not properly prepared for the fall off in trade.

I for one, like most consumers, will be doing most of my Christmas shopping later and spending more than I expected like last year.

Tarlok Teji
Head of UK Retail Industry Sector

HIGHLIGHTS – 2007

  • Two-thirds (66%) of all consumers will use the internet in some way for Christmas gift shopping. In addition, 14% of all shoppers will undertake the majority of their Christmas gift shopping on the web, compared to just 7% in 2006. This is equivalent to £2.1 billion of sales.
  • High technology based electronic items are becoming ever more popular as 56% of consumers would like to receive these products compared to 47% in 2006. This includes products such as the Nintendo Wii and other games consoles, iPods and MP3 players.
  • Although convenience remains fundamental, price is declining in importance as a main driver of where people choose to shop for gifts. Consumers want retailers to go beyond a commoditised offer.
  • There is a growing trend towards premiumisation as 16% of consumers will buy food from a farmers’ market (up from 9% in 2006) and 19% of consumers plan to buy a designer handbag as a gift this year.
  • Indulgence will be commonplace over the festive period, but a gender divide exists as women prefer to receive beauty items while men enjoy receiving the latest gadgets.
  • Consumers continue to delay the start of their Christmas shopping with four out of ten consumers not expecting to start their gift shopping until some time in December, compared with just three out of ten consumers in 2006.
  • The high street continues its fight back as the key destination for gifts at the expense of department stores. Almost four out of ten consumers are choosing the high street to buy most of their gifts.
  • Buying local has emerged as a new trend this Christmas, as consumers return to small local, independent stores and markets for Christmas food shopping. Thirty percent of consumers agree that they will buy more products from local producers or local shops this Christmas than in the past.
  • Consumers intend to spend 7% more on Christmas this year than in 2006, with total average spending reaching £706 compared with £662 in 2006. The total predicted spend this Christmas is £33.6 billion. This is driven by a significant increase in the planned expenditure on socialising, estimated at £6.8 billion and food and drink combining an estimated £8.9 billion this year. Gift expenditure is also set to increase, with consumers stating they will spend 2% more on gifts compared to last year equating to a £18.3 billion gift market.
  • Boys, not girls, are more likely to receive the most expensive gift this Christmas. This reflects the higher demand for high-tech gadgets and the increased appetite for interactive toys.
  • We are a nation of Christmas savers with half of the UK population making a conscious effort to plan ahead and spread the cost of Christmas over the year.

CHRISTMAS GOES ELECTRIC

The internet is now a genuine shopping destination. Sixty one percent of households in Great Britain have access to the internet from home1 in 2007, over half of the UK population have shopped online in the last year and the number of consumers doing most of their Christmas gift shopping online is set to double this year.

The internet is this year’s rising star, doubling its share of consumers to 14% from 2006. Verdict research (2007) reports that 31 million people in the UK now shop on the internet and our research indicates that at Christmas seven million of them will be doing most of their shopping online. Internet Christmas gift shopping represents 23% of the total online shopper population, spending an estimated £2.1 billion on gifts over the internet this Christmas. Achieving 11% of the total Christmas gift market (£18.3 billion), the internet has become a much more widely used and accepted channel for consumers to shop. For seven million people the internet is not just a place to pick up a few presents, it is the main destination for a wide range of items from chocolates and wine, to MP3 players and other gadgets.

From Bricks And Mortar To Seamless Multichannel

The use of the internet for Christmas gift shopping has increased significantly in 2007, with around four out of ten using it to research and purchase gifts. Two-thirds of consumers use the internet one way or another when gift shopping.

The core internet population shopping online for gifts this Christmas is 16 to 44 year-old ABC1s. As well as using it for a wide range of purchases, the technology-savvy consumers in the 16 to 24 age group are much more likely than any other age group to use the internet for research-only purposes. This is partly because a large proportion of this age group sees the internet as an important part of their lives, whether it be for work, school, fun or socialising. People in the South are much more likely to use the internet for gift purchasing at Christmas compared with people in the North. As the internet shopping market matures, more consumers are becoming increasingly adventurous and are going beyond just visiting and using well established, high-profile websites such as Amazon and high street brands like Marks & Spencer.

Our research shows there has been significant growth in every website category in 2007, with internet trading sites seeing the biggest increase in popularity. Men are much more likely than women to use manufacturers’ websites and 16 to 24 year olds are more likely to use high street store websites to do their gift shopping.

Reasons why people choose not to go online to do their Christmas shopping are becoming less structural as retailers improve fulfilment operations, internet access penetration continues to grow and fears over online fraud and security are being addressed. People who choose not to shop online for gifts prefer to go to a store to see and handle the products and to embrace the in-store shopping experience.

Growth in online sales is being driven by the increase in the number of retailers selling online, as well as retailers with an existing transactional website gaining online market share. Our retailers’ survey this year shows that 72% of retailers provide transactional websites, up from 51% last year. Many more retailers will be launching online shops in time for Christmas with the likes of House of Fraser, New Look, and Next’s Branded Directory coming online this Autumn. Three-quarters of the retailers surveyed expect their online sales to grow.

But Sales Penetration Is Low

However, the majority of retailers surveyed only expect to make 10% of their total sales, or less, through the internet and this statistic has not moved on in the past two years. For many commentators, the advent of internet shopping signalled a dramatic impact and change for the retail sector. However, in reality, although it is growing rapidly, it is not gaining a strong penetration of the sector. The internet is, for most retailers, the complementary channel to bricks and mortar and another way to connect with the customer. In fact, for those not online, particularly with fast-growing niche brands, it is often the case that launching a transactional website is equivalent to opening two or three stores, which is seen as more important to building presence in the market and enhancing brand equity.

Seventy-one percent of retailers interviewed are planning to increase retail footage over the next 12 months, with half of this space coming into the high street. This indicates that physical stores are still the main focus for a majority of retailers.

Retail Challenge

Although most retailers recognise that an online presence is important, not all understand the need to adopt an integrated multichannel retailing strategy as part of their growth agenda.

Key Facts

  • Those living in Greater London and the South East are more internet savvy.
  • 46% of Scots and 42% in Yorkshire do not use the internet at all, compared with the 34% national average.
  • 54% of retailers offer, or are planning to offer, their full product range online.
  • 44% of retailers offer, or are planning to offer, flexible returns.
  • 41% of retailers use, or are planning to use, promotions online to drive traffic in store.
  • 38% of retailers have an order online and pick up in store facility or are planning to implement one.

"Many more retailers will be launching online shops in time for Christmas with the likes of House of Fraser, New Look, and Next’s Branded Directory coming online this Autumn."

Visit www.deloitte.co.uk/theretailreview to read our related articles:

  • Shopping in the information age.
  • Radio Frequency Identification: An uncertain future.

DECADES OF CHANGE

By examining the key characteristics of consumer behaviour over the past three decades, it is clear why retailers have a much harder task in satisfying demand than they did in the past.

In the beginning, manufacturers were the stronger force in the consumer, retailer and manufacturer triad. Retailers eventually acknowledged the untapped potential of a captive audience within their stores and started engaging directly with their customers to understand their needs and influence their purchasing behaviour.

Today the consumer has taken centre stage. Retailers and manufacturers can no longer produce goods and just expect them to sell as consumers have advanced to the lead role in the retail triad. They want what they want, when and how they want it. After decades of settling for whatever retailers chose to give them, customers now expect products that respond to their demanding lifestyles.

Visit www.deloitte.co.uk/theretailreview to read our related articles:

  • Multichannel marketing media opportunities.
  • Are consumers dreaming of a green Christmas?

Retailer Challenge

Following this shift in the balance of power, is your infrastructure sufficiently aligned to engage today’s consumer? Many retailers are still organised in their historic silos of buying, distribution, retail operations and finance, or by fascia with online as a bolt on.

There are now many ways to engage with the consumer on multiple levels and using multiple media touch points. Very few retailers have really grasped this shift in consumer behaviour and the first few to do this will own generations X, Y and Z.

BEYOND PRICE

While convenience continues to be the main driver of where people choose to shop for gifts, price is no longer a key consideration. Consumers have come to expect low prices and are now looking for retailers to go beyond a commoditised offering.

Convenience remains the primary factor for consumers when choosing where to shop. This has increased significantly as the main choice motivator, from 50% in 2005 to 62% in 2007. In particular, there is a significant increase in demand for ‘ease of home delivery’.

Price continues to decrease in importance as years of low inflation has created a nation of smart shoppers who don’t consider price as the key driver of where they shop for gifts. This is a direct consequence of retailers having invested heavily in securing lower prices for consumers, while increasing value for money through improved quality and extended product ranges over the last five years.

Price is no longer a sufficient driver of brand equity and loyalty; consumers want more. Consumers also told us they expect relevant choice, quality products and services, whether in store or online. It also seems that consumers can be persuaded to spend more per transaction when it comes to gifts.

Retailer Challenge

Putting the customer first is important for any successful retail business and although the majority of retailers are catering for basic demand, developing a clear understanding and strong relationship with customers has become even more critical.

Retailers need to ensure a full integration into their offering of their customer lifestyles and retain an emotional contact with the consumer.

Visit www.deloitte.co.uk/theretailreview to read to our related articles:

  • Self-checkout: Enhancing convenience through technology.

LUXURY FOR ALL

Premiumisation represents a real growth avenue. An increasing number of people have more than one holiday a year, eat in restaurants at least once a month and buy top of the range items in supermarkets.

At Christmas, premiumisation is even more apparent as consumers look for higher quality, more indulgent products. They will treat themselves to indulgent purchases, whether it is luxury mince pies or organic, free-range turkeys.

This trend is also visible in where people choose to shop for food. Our research shows that while grocery retailers still capture 77% of the main Christmas food shopping, other sources are seeing a growing share of spend. Markets, small local independent stores and variety stores such as Marks & Spencer, are significantly growing in popularity. Consumers increasingly seek quality goods, tradition and authenticity, and this is particularly relevant at Christmas.

Retailer Challenge

Retailers and manufactures need to work together to innovate and add value to everyday consumer products. Indulgence plays a vital role in positioning premium products as consumers are attracted by the idea of ‘exclusivity’ and will be prepared to pay a premium price to access it.

From Cheap To Chic

Five years ago ‘fast fashion’ became a core strategy for the likes of Topshop, George, Zara and H&M. This wave led to the democratisation of fashion. Today it’s the turn of luxury products. Cashmere has arrived on the shelves of supermarkets and celebrities have created their own aspirational ranges for high street stores.

Our consumer research has highlighted that lifestyle products, such as designer accessories, are showing a significant increase this year as 19% of consumers intend to buy a designer handbag or shoes as a gift this Christmas. This follows the growing trend of buying into ‘must have’ vogue items.

Within the food sector, premiumisation is being driven by the rise of health and wellbeing concerns, combined with the longer term trend towards convenience.

Consumers are not seated at one end of the spectrum; they are combining cheap with chic when purchasing clothes, luxury with basic and healthy with indulgent products in food.

Retailer Challenge

There are opportunities to exploit the long tail of the consumer market. In such a saturated mass market, retailers need to consider niche propositions where they are not competing on price. H&M’s new store format Cos and Ikea’s Stockholm range are good examples of this.

Visit www.deloitte.co.uk/theretailreview to read to our related article:

  • The cost of counterfeit at Christmas.

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