The Deloitte Consumer TrackerA taste of spring to come

Q1 2013

A Deloitte Insight Report

Contents

About this researchThe Deloitte Consumer Tracker is based on a consumer survey carried out by independent market research agency, YouGov, on our behalf. This survey was conducted online with a nationally representative sample of over 3,000 UK adults aged 18+ between 28 March and 2 April 2013.

A note on the methodologySome of the figures in this research show the results in the form of a net balance. This means that in a survey of 100 respondents, assume that 30 reported they are spending more, 50 reported no change and 20 reported they are spending less. The net balance is calculated by subtracting the number that reported they spent less from the number that reported they spent more, i.e. 30 – 20 = 10. This means 10% of consumers reported that they spent more rather than less.

Executive summary 1

Consumer confidence 2

Household disposable income 3

Economic outlook 4

Spending behaviour in the last quarter 5

Consumer spending outlook 8

Contacts 10

2013 got off to an encouraging start with consumer confidence in disposable income improving for the fifth consecutive quarter.

The first quarter of 2013 has confirmed that the necessary conditions to reinvigorate consumer optimism are starting to emerge. In 2012 there were tentative signs of improvement: inflation fell which in turn helped to fuel a slight increase in discretionary spending. However, consumers remained cautious and continued to deleverage and save in anticipation of rising food and utility prices.

The latest Deloitte Consumer Tracker shows that in Q1 2013 confidence regarding disposable income is at its highest since the Tracker began in Q3 2011. There is less pressure on consumers’ ability to spend as market uncertainty subsides and key macroeconomic indicators such as housing prices and retail sales start pointing in the right direction.

Moreover, consumers have healthier balance sheets, having worked hard to pay down some of their debt since the beginning of the economic slowdown. They are also reluctant to take on more debt, making the uptrend in consumer expenditure since the first quarter of 2012 even more significant. Recent Bank of England figures show that secured lending has fallen over the last four years, and although this reflects a drop in the number of housing transactions, it is also a sign that consumers are changing their attitude to debt.

The consumer environment is also starting to improve. Although real earnings growth remains weak, and below inflation at just 0.3 per cent in 2012, it is better than the 1.7 per cent average annual contraction since 2008.

The question remains whether low debt interest and expectations of improving credit availability will be sufficient to give consumers enough confidence to continue to increase their spending in 2013. However with inflation forecast to rise in the next few months confidence could remain fragile.

The Deloitte Consumer TrackerQ1 2013

Key findings:

•Sentiment on disposable income is stronger than at any time since Q3 2011.

•UK household conditions remain stable in the first quarter of 2013.

•The consensus is for the recovery to gain traction as 2013 progresses.

•Despite a slight improvement compared to Q1 2012, spending remains subdued.

•Looking ahead consumers remain concerned about rising utility prices.

The Deloitte Consumer Tracker Q1 2013 1

•While household disposable income remains the main area of concern for consumers, it has continued to improve since the launch of the Deloitte Consumer Tracker in Q3 2011, showing a nine percentage point improvement compared to a year ago (from -40 per cent to -31 per cent).

•Sentiment improved on all measures compared to the previous quarter.

•Sentiment surrounding job security improved by three percentage points this quarter, the fastest rate since Q1 2012. Similarly debt levels at -9 per cent have nearly halved since the Tracker began in 2011.

Figure 1. UK consumer sentiment

Net % of UK consumers who said that their level of confidence has improved the last three months

Question: Thinking about the following aspects of your life … over the past three months would you say that your level of optimism/confidence in each area is better, the same or worse?

Yourchildren’seducation

and welfare

Yourlevel

of debt

Yourjob

security

Your jobopportunities/

careerprogression

Yourgeneral

health andwellbeing

Yourhouseholddisposable

income

Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013

-43% -3

9%-4

0% -36% -3

3%-3

3% -31%

-13% -1

0%-1

1%-1

3%-1

2%-1

5% -12%

-16% -1

3% -12%

-12% -10%

-13% -1

0%

-15%

-15%

-10%

-11%

-10%

-12% -9

%

-16% -1

3%-9

%-1

5%-1

0%-1

2%-9

% -6%

-1%

-3% -2%

-1%

-3% -2%

•Consumer confidence stabilised in Q1 2013 and is five points higher than at the same time last year, according to the GfK NOP consumer confidence index.

Figure 2. Consumer confidence index

-45

-40

-35

-30

-25

-20

-15

-10

-5

0

Mar13

Nov12

Jul12

Mar12

Nov11

Jul11

Mar11

Nov10

Jul10

Mar10

Nov09

Jul09

Mar09

Nov08

Jul08

Mar08

Nov07

Jul07

Mar07

Nov06

Jul06

Mar06

Source: GfK NOP

•After falling steadily in 2012, consumer price inflation has edged up over the last three months reaching 2.8 per cent in February and remaining at that rate in March. The Bank of England expects that in the second half of this year inflation could rise above 3 per cent due to increasing energy prices and higher import costs.

Figure 3. UK annual CPI inflation (%)

0

1

2

3

4

5

6

7

8

9

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

Source: Office for National Statistics

Consumer confidence

Sentiment on disposable income is stronger than at any time since Q3 2011.

2

Household disposable income

•While 14 per cent of UK households saw a reduction in income in the first quarter of 2013, the same proportion of households received a pay rise or bonus.

•People who received a pay rise or a bonus were twice as likely to be high income earners. In contrast those who saw a reduction of income were more likely to be from less affluent income groups.

•This polarisation is reflected in the good performances reported by retailers at each end of the retail market.

Figure 4. Changes in personal household circumstances in the past three months

% of UK consumers

Question: Thinking about your household circumstances in the past three months, which of the following apply to you or someone in your household?

Q1 2012Q1 2013

Adult with no income joinedthe household

A dependent child or family memberbecame financially independent/

recently became employed

Being laid off/made redundant/lost job

You or someone in your householdreceived a pay rise/bonus

Reduction/loss of some income(e.g. working reduced hours, etc.)

14%15%

14%15%

6%7%

4%2%

4%3%

•Real earnings growth remained weak and below inflation, at just 0.3 per cent in 2012. However it is better than the average 1.7 per cent annual contraction since 2008.

Figure 5. Average earnings growth and UK national inflation (%)

-6

-4

-2

0

2

4

6

8

20132012201120102009200820072006

UK annual CPI inflation (%) Average weekly earnings including bonuses (%)

Source: ONS

•In the final quarter of last year real spending was buoyed by rising prices in energy, food and drink, and clothing.

•Overall real consumer spending has grown in each of the past five quarters by a total of around 2 per cent.

Figure 6. Consumer expenditure and disposable income growth (%)

Consumer disposable income (%) Consumer spending (%)

-6

-4

-2

0

2

4

6

Q4‘12

Q2‘12

Q4‘11

Q2‘11

Q4‘10

Q2‘10

Q4‘09

Q2‘09

Q4‘08

Q2‘08

Q4‘07

Q2‘07

Q4‘06

Q2‘06

Q4‘05

Q2‘05

Q4‘04

Q2‘04

Q4‘03

Q2‘03

Q4‘02

Q2‘02

Q4‘01

Source: ONS

UK household conditions remain stable in the first quarter of 2013.

The Deloitte Consumer Tracker Q1 2013 3

Economic outlook

•There is still a risk that the economy could enter a triple dip recession, but the consensus is for the recovery to gain traction as 2013 progresses.

Figure 7. GDP growth (%)

-8

-6

-4

-2

0

2

4

6

2013201220112010200920082007

Forecasts

Quarter-on-quartergrowth

Year-on-yeargrowth

UK growth to seeweak recovery

Source: ONS, consensus forecasts from The Economist and Deloitte calculations

•Recent official figures indicated that the labour market’s recovery stalled for the first time in 16 months as employment fell.

Figure 8. UK private and public sector job growth (thousands)

Number of jobs added/lost each quarter, private sector vs public sector

PublicPrivate

-300

-200

-100

0

100

200

300

400

500

Q4‘12

Q3‘12

Q2‘12

Q1‘12

Q4‘11

Q3‘11

Q2‘11

Q1‘11

Q4‘10

Q3‘10

Q2‘10

Q1‘10

Q4‘09

Q3‘09

Q2‘09

Q1‘09

Q4‘08

Q3‘08

Q2‘08

Q1‘08

Q4‘07

Q3‘07

Q2‘07

Q1‘07

Source: ONS

•Encouragingly, the latest Deloitte CFO Survey shows a strikingly broad-based rise in confidence as British businesses look set to benefit from a less risky, and improving, global economic backdrop.

Figure 9. UK CFOs uncertainty

% of CFOs who rate the level of external financial and economic uncertainty facing their business as above normal, high or very high

72

77

82

87

92

97

Q1‘13

Q4‘12

Q3‘12

Q2‘12

Q1‘12

Q4‘11

Q3‘11

Q2‘11

Q1‘11

Q4‘10

Q3‘10

Sharp fall in uncertainty

Source: Deloitte CFO Survey

The consensus is for the recovery to gain traction as 2013 progresses.

4

Spending behaviour in the last quarter

•Consumers spent more on utilities in Q1 2013 as a result of increased energy prices, while spending in discretionary categories continued to ease compared to a year ago.

•Although clothing and footwear are showing an improved performance year on year, there was a deterioration in Q1 2013 following the coldest March on record.

•Spending on main household appliances increased in Q1 2013, a sign that consumers are starting to consider buying bigger ticket items.

Figure 10. Category spending in the past three months

Net % of UK consumers spending more by category over the past three months

Question: Thinking about all the expenses in your household, for each of the following, would you say you have spent more, less or the same in the past three months?

Q1 2012Q1 2013

Utility bills(e.g. water,electricity,gas and

other fuels)

Groceryshoppingfor foodand non-alcoholic

beverages

Housing(e.g. rent,mortgage,

maintenance)

Holidays(longbreak)

Majorhouseholdappliances

(e.g. washingmachine, fridge,cooker, vacuum

cleaner, etc.)

Alcoholicbeverages

andtobacco

Furnitureand

homeware

Restaurantsand hotels

(eatingout and

short break)

Clothingand

footwear

Going out(e.g. cinema,

theatre,concerts, etc.)

-26%-24% -23%

-17%-20%

-17% -17%-14% -14%13% -12%

-8%-11%

-8%

12% 11%

23%25%

43%48%

•After four consecutive months at 2.7 per cent, despite food inflation easing, higher energy prices and the inclusion of student fees pushed inflation to 2.8 per cent in February. Inflation remained stable in March at 2.8 per cent.

•According to consensus forecasts, inflation is likely to rise above 3 per cent in the second half of 2013 and fluctuate around this level into 2014.

Figure 11. UK CPI categories

March 2013 March 2012

-5 0 105

3.7

15 20

Food & non-alcoholic beverages

Alcoholic beverages, tobacco& narcotics

Clothing & footwear

Housing, water & fuels

Furn, HH equip & repair of the house

Health

Transport

Communication

Recreation & culture

Education

Hotels, cafes & restaurants

Miscellaneous goods & services

Total inflation 2.8

1.1

3.1

19.7

1.8

3.5

2.7

2.9

5.1

-0.6

4.8

3.3

2.8

4.5

-0.4

6.38

3.3

1.7

2.3

0.24.1

6.2

3.2

4.6

Source: ONS

Despite a slight improvement compared to Q1 2012, spending remains subdued.

The Deloitte Consumer Tracker Q1 2013 5

•Consumers are becoming more discerning, and defensive spending strategies saw a slight increase in the first quarter.

Figure 12. Reasons consumers spent less in the last three months

% of UK consumers spending less

Question: You just mentioned you spent less in the last three months, which of the following reasons apply to you?

Bargain huntingImpulse (less)Trading down

15%

20%

25%

30%

35%

40%

Q1 2013Q4 2012Q3 2012Q2 2012Q1 2012Q4 2011Q3 2011

•Growth in expansionary behaviours is being attributed to higher prices.

Figure 13. Reasons consumers spent more in the past three months

% of UK consumers spending more

Question: You just mentioned you spent more in the last three month, which of the following reasons apply to you?

Sale/Special offerTrading upPrice driven

15%

20%

25%

30%

35%

Q1 2013Q4 2012Q3 2012Q2 2012Q1 2012Q4 2011Q3 2011

•There was a notable improvement in retail sales in February, but poor weather so far this spring and fears of rising inflation may yet dampen sales towards mid-year.

Figure 14. Retail sales annual volume growth (%)

UK retail sales including automotive fuel (Volume) 3 months moving average

-6

-4

-2

0

2

4

6

8

Feb-

13

Sep-

12

Apr

-12

Nov

-11

Jun-

11

Jan-

11

Aug

-10

Mar

-10

Oct

-09

May

-09

Dec

-08

Jul-0

8

Feb-

08

Sep-

07

Apr

-07

Nov

-06

Jun-

06

Jan-

06

Aug

-05

Mar

-05

Oct

-04

May

-04

Dec

-03

Aug

-03

Mar

-03

Source: ONS

6

•Fewer consumers claim to be paying a mortgage compared to a year ago. This is in line with a recent Bank of England report showing a fall in secured lending, reflecting a drop in the number of housing transactions.

•As a result more people are renting compared with a year ago.

Figure 15. UK consumer monthly financial obligations

% UK consumers

Question: Thinking about your household financial outgoings every month, which of the following apply to you?

Q1 2012Q1 2013

Pay moneyinto a

savingsaccount

Repay thetotal balanceof my credit

card(s)

Pay amortgage(s)

Pay intoa pension

fund

Pay rentHave anoutstandingbalance on

credit card(s)

Makerepaymentson a loan(s)

26% 26%30% 31% 29% 31% 33% 32%

36% 34% 37% 38%

48% 46%

•Consumers continue to rebuild their finances with payments into savings accounts increasing.

•At the same time demand for credit cards rose compared to a year ago.

Figure 16. UK consumer attitudes to financial obligations in the last three months

Net % of UK consumers

Question: Now thinking about the financial obligations of your household over the last three months, what, if anything, did you do differently compared to four to six months ago; increase, reduce or do the same?

Q1 2012Q1 2013

Mortgage(s)repayments

Payment intoa pension

Credit card(s)/loan(s) repayments

Number of creditcard(s)/loan(s)

Pay money into asavings account

-10%

-8%

-6%

-1%

1%2% 2%

1%0%

-3%

•The savings ratio was at 7.2 per cent in 2012, its highest since 1997.

•As consumers focus on improving their finances, they spend less as shown by subdued consumer spending levels. However, this is also encouraging as they will be in a better to position to spend once their confidence returns.

Figure 17. Savings ratio (%)

-10123456789

Q4

2012

Q3

2012

Q2

2012

Q1

2012

Q4

2011

Q3

2011

Q2

2011

Q1

2011

Q4

2010

Q3

2010

Q2

2010

Q1

2010

Q4

2009

Q3

2009

Q2

2009

Q1

2009

Q4

2008

Q3

2008

Q2

2008

Q1

2008

Q4

2007

Q3

2007

Q2

2007

Q1

2007

Q4

2006

Q3

2006

Q2

2006

Q1

2006

Q4

2005

Source: ONS

•Our data reveals a polarised perception of credit conditions and attitudes to saving in the UK.

Figure 18. Consumer sentiment on access to credit and savings

I will be betteroff as a result of

the measuresannounced in the

recent GovernmentBudget

Compared to ayear ago, I amsaving more

money

Compared toa year ago,

credit cards arenow moreaffordable

Compared to ayear ago, loansare now more

affordable

Compared to ayear ago,

mortgages arenow moreaffordable

Compared to ayear ago, I am

paying-offmore debt

Compared to ayear ago, as a

householdwe are spending

less cash thanwe have available

Strongly agree/Agree Strongly disagree/Disagree Net balance

-33%-29%-24%-22%

-14%-3%-3%

12%18%

6%8%12%19%

25%

45%46%

30%30%27%22%

28%

The Deloitte Consumer Tracker Q1 2013 7

•Consumers remain concerned by rising utility bills following an unseasonably cold start to the spring.

•As a result, consumers expect utility prices to continue to rise in Q2 2013.

Figure 19. Category spending in the next three months

Net % of UK consumers spending more by category over the next three months

Question: And now thinking about all the expenses in your household in the next three months, for each of the following, would you say you will spend more, less or the same compared to four to six months ago?

Q1 2012Q1 2013

Uti

lity

bills

(e.g

. wat

er,

elec

tric

ity,

gas

and

oth

er f

uels

)

Gro

cery

sho

ppin

g fo

r fo

od a

ndno

n-al

coho

lic b

ever

ages

Hou

sing

(e.g

. ren

t,m

ortg

age,

mai

nten

ance

)

Hol

iday

s (lo

ng b

reak

)

Alc

ohol

ic b

ever

ages

and

toba

cco

Furn

itur

e an

d ho

mew

are

Clo

thin

g an

d fo

otw

ear

Maj

or h

ouse

hold

app

lianc

es

(e.g

. was

hing

mac

hine

, fri

dge,

cook

er, v

acuu

m c

lean

er, e

tc.)

Res

taur

ants

and

hot

els

(eat

ing

out

and

shor

t br

eak)

Goi

ng o

ut (e

.g. c

inem

a,th

eatr

e, c

once

rts,

etc

.)

-20%-18%

-16% -17%-19%

-16% -15% -16%-12%

-15%

-6% -7%

9%10% 11%12%

27%

21%

-18%-18%

•Consumers intend to continue to cut their number of credit cards and loans, and save more, confirming the consistent trend of 2012.

Figure 20. UK consumer attitudes to financial obligations in the next three months

Net % of UK consumers

Question: Again, thinking about the financial obligations of your household, which of the following, if any, do you intend to do in the next three months; increase, reduce or do the same?

Q1 2012Q1 2013

Pay money into asavings account

Payment intoa pension

Mortgage(s)repayments

Credit card(s)/loan(s) repayments

Number of creditcard(s)/loan(s)

-9%-8%

0%

-2%

1%

3% 3%3%4%

0%

Consumer spending outlook

Looking ahead consumers remain concerned about rising utility prices.

8

•Spending intentions on big ticket items remain stable compared to Q1 2012.

Figure 21. UK consumers planning major purchases in the next three months

% of UK consumers

Question: Below is a list of statements that may apply to you/your household … can you please indicate which of the proposed circumstances best applies to you/your household?

Q1 2012Q1 2013

3%3% 3%3%5%5% 5%5%

7%8%

9%9%

19%20%

3%2%

Paying fora longbreak

holiday

Adding anextension

to thehouse or

redecoratinga room

Buying anexpensive

electrical item(e.g. iPhone,

flat screen TV,computer/

laptop, etc.)

Buying amajor homeappliance

(e.g. washingmachine,

dishwasher,fridge, etc.)

Buyinga car

Upgrading:movinginto a

larger home

Downsizing:moving into

a smallerhome

Selling anexpensive

electrical item(e.g. iPhone,

flat screen TV,computer/laptop, etc.)

to save money

•One of the official measures of major purchases increased to -23, which is eight points higher than this time last year.

Figure 22. Major purchases intentions

-50

-40

-30

-20

-10

0

10

20

20132012201120102009200820072006

Source: GfK

The Deloitte Consumer Tracker Q1 2013 9

Authors Leadership team

Ben PerkinsHead of Research, Consumer Business020 7307 2207beperkins@deloitte.co.uk

Nigel WixceyIndustry Leader, Consumer Business020 7303 5007nigelwixcey@deloitte.co.uk

Céline FenechResearch Manager, Consumer Business020 7303 2064cfenech@deloitte.co.uk

Ian GeddesLead Partner, UK Retail020 7303 6519igeddes@deloitte.co.uk

Graham PickettLead Partner, UK Travel, Hospitality and Leisure01293 761232gcpickett@deloitte.co.uk

Contacts

10

Notes

The Deloitte Consumer Tracker Q1 2013 11

Notes

12

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