The current political and economic climate is a perfect storm for the retail industry. In the immediate aftermath of Brexit, consumer confidence and spending may have grown, but the most recent positive growth – a 1.4% rise in February – should be regarded with caution, coming as it does off the back of an unremarkable Christmas and a fall in sales in January.
Inflation doubled to 1.8% between October and January and some economists predict that this will rise as high as 3% in 2017. Now Article 50 has been enacted, the UK faces protracted negotiations until early 2019 and there is no clarity on how any deal will impact free trade. However, what can be said with certainty is that the cost of doing business for retailers is rising – business rates are increasing, the cost of fuel and commodity is on the up, as are staff costs, and the cost of imports with a weaker pound is already leading retailers to increase prices.
Whilst the press has celebrated some single digit increases, there was a 30% drop in the value of retail sales between November and December last year according to the Office for National Statistics, and the underlying trend is that retail sales are dropping at the fastest rate for seven years. Retail spending correlates perfectly with consumer confidence, as the 2008 crash showed us; it seems that if you listen to the experts, rather than politicians or the media, it is only a matter of time before we see deeper economic challenges as a result of Brexit. To quote Chris Williamson, a leading business economist, “The consumer, which has provided the main engine of UK economic growth in recent years, is showing signs of running out of steam.” A higher cost of doing business, combined with lower consumer demand and trade barriers with the EU, do little to reassure.
However, there is still good news on the horizon. The high street may be struggling but the pace of digital disruption in the retail sector is still accelerating. E-commerce may only account for 17% of all UK retail sales but this is predicted to increase to 22.6% by 2020 – Amazon alone is growing at a rate of about 13% year on year, with 2017 sales forecast at around $136bn. Consumer confidence in transacting via their smartphones has now made it an established norm: over Christmas, purchases on smartphones and tablets accounted for 42% of online retail sales, and a recent study by PwC showed that 34% of respondents agree that their mobile phone will soon become their main purchase tool.
The next wave of digital disruption, spearheaded by artificial intelligence and conversational commerce through social platforms, is well underway. Data-driven marketing techniques are shifting investment out of media such as press and radio and into digital channels, where the advertiser knows much more about the customer. Location-based marketing using geo-location data as a determiner of future intent is fast gathering steam; businesses like Xad and Locomizer not only provide unique analytics around in-store behaviour but allow retail brands to target that behaviour with real-time offers and prompts. Whilst many retailers have been closing stores to manage fixed costs, others are re-imagining the role of their physical stores to create a richer customer experience and leverage the power of the human touch in a new way that digital can not deliver.
So, how do retail brands win in the eye of this perfect storm?
At Havas we recently revealed the latest wave of our bi-annual Meaningful Brands research. This study measures which brands are actually meaningful to people and improve the quality of their lives, rather than the value of that brand. The results are rather telling; two years ago the list of the top ten most meaningful brands in the UK was busy with seven of the top ten being retailers. In 2017, this has dropped to just four, namely Lidl, Sainsburys, Waitrose and Ikea.
What has also changed is the expectation from consumers that brands will play an active role in improving their quality of life; 62% vs 58% in 2015. Retail brands are a key tenet of the local community and therefore there is an expectation that they play a role in helping local people, but also in creating jobs and contributing economically. This is ratified by the fact that retail continues to be the most meaningful category to people.
Retailers are increasingly finding new and innovative ways to encourage consumers to part with their hard-earned cash. Social commerce is more and more becoming a destination for retailers, with instant purchasing and the ability to create wish lists from social media feeds now common place. Stores are playing to their advantage of a physical presence by creating domesticated retail environments, merchandising products within home-like settings, and in-store technology that lets people engage with virtual versions of products or enjoy the benefits of smart fitting rooms, are giving people a new reason to visit the high street.
Our Meaningful Brands research illustrates that the brands who invest in creating rich experiences and content that serve people’s needs, are winning. That said, many retailers are still lagging behind: 65% of content created by retail brands is not considered meaningful – it neither informs, helps, nor entertains them. Retail brands over-index on the functional benefits they provide to consumers but our analysis reveals that the opportunity is for retail brands to invest more in improving the personal wellbeing of the consumer. In the Meaningful Brand Index for retail, only 27% of the contribution comes from personal; the most meaningful brand in the study, Whatsapp, scores 4.2/5, compared to an average of 3.5/5 when it comes to providing personal benefit.
This piece started by outlining the uncertainty that surrounds consumer spending and the relationship this has to consumer confidence. Retailers have a unique chance to seize the opportunity to create confidence themselves by concentrating on what is important to people personally and to the communities in which they live. Reassuringly, our Meaningful Brands study shows that this is possible but it requires a re-assessment of communication priorities and the KPI’s to measure success. Too often a quick sale and margins has dominated, which has resulted in short-termism through the value chain. Now is the time for retail brands to step back and recognise that they fulfil a bigger purpose.
For any cynical CFOs reading this and frowning, I say this: The more meaningful a brand is the better their business performance; the top performers in terms of the Havas’s Meaningful Brand Index outperform the stock market by up to 206%. For the retail category, brands that are able to deliver a 10% improvement in their Meaningful Brand Index are able to charge a 12% price premium. Focusing on serving the customer and enriching their lives will undoubtedly deliver competitive advantage.
By Paul Frampton, CEO Havas Media Group UK & Ireland.