Banks, Lenders & Investors Business Development & Marketing Finance General

August 2018 Key Indicator: is consumer spending undergoing a massive change?

consumer spending - a devastated landscape?The UK economy is generally described as a consumer economy.  This means that its health is significantly dependent on and measured by how households spend or save their income.
The effects of changes in consumer spending behaviour can be dramatic for businesses as my July 2018 Key Indicator on the retail sector demonstrated.
But consumer spending behaviour is not simply directed by a change in habits and tastes.  In this month’s Key Indicator, I look at those factors that affect how much disposable income is available and how this influences spending decisions.
The majority of consumer income is earned as salary or wages from employment.
This may be topped up by benefits, such as the tax credit system for households with children, where family income is low. This was restricted to being payable for the first two children only, following various adjustments to state benefit rules since the 2008 financial crash and the introduction by the Government of various “austerity” measures as part of efforts towards economic recovery.
For the retired, household income generally comes primarily from state and occupational pensions.
Household income may also be topped up by interest and dividends from any savings but recently these have been low, none the least due to the unprecedented low levels of interest rates.

The factors that affect disposable income and therefore consumer spending

There have been several worrying indicators that consumer spending has been sluggish throughout 2018, and this has a significant impact on the health of an economy like the UK’s.
The most recent figures published by the Office for National Statistics (ONS) on household consumption are for the first quarter of the year, from January to March. Although there is always a time lag in publication they are indicative of a longer-term trend.
Consumption remained subdued at 0.2% in Quarter 1 2018 according to the ONS and in 2017 annual growth in household consumption remained at its weakest since 2012. The ONS reports that this is “consistent with the slowdown in output for consumer-focused services industries, which has been on a declining trend since late 2016.”
The factors that are likely to have affected this are the weak growth in real wages, with household incomes squeezed by rising import prices following the past depreciation of £Sterling following the 2016 Referendum vote to leave the EU.
According to the ICAEW (Institute of Chartered Accountants in England and Wales) sluggish wage growth at on average 2% in the face of a near- 3% inflation rate is also a major factor in the squeeze on household incomes.  This is despite unemployment being at its lowest level since the early 1970s and therefore the existence of a skills shortage in some sectors. But it is outweighed by the existence of such things as tax and benefit reforms, the growth of the “gig economy” and zero hours contracts that have changed the employment landscape for both businesses and employees and in turn reduced the reported level of unemployment statistics.
Kamal Ahmed, the BBC’s economics editor says he looks at two statistics when examining people’s finances.  These are firstly whether they are net borrowers or net lenders, and secondly at their savings ratio.
Net borrowers are either borrowing, or spending their savings, to make ends meet.  Net lenders are those “lending” money to the economy in the form of pension contributions, savings and investments”.
The savings ratio is the proportion of people’s disposable income that they save. Here again there are worrying signs in the most recent ONS data. The savings ratio is currently at 4.1%, the third lowest since records began in 1963.
As I reported in my blog on Tuesday (July 31) the most recent statistics from the Insolvency Service, on the second quarter of the year, April to June 2018, also revealed a worrying indicator on individual and household finances. This was that numbers of individual insolvencies had reached their highest level since the first quarter of 2012 and had increased by 4.4% compared with January to March 2018. Again, this has been an upward trend for several months.
According to the ONS British Households spent on average £900 per year more than they received in income in 2017 and there are signs that people are increasing their borrowing. There are three main sources for personal lending which are all growing: credit cards, finance for capital items like cars, and payday loans. Most of this debt is not to buy luxuries but simply to make ends meet since so many people live paycheck to paycheck.

The implications for SMEs of a potential change in consumer spending habits

Clearly the retail sector is the first to feel the effects of changes in consumer spending and arguably the shift to online purchases has not only been because of the convenience but also because buying goods online can often be less expensive.
Equally the rise of the budget food stores, such as Aldi and Lidl, suggest a shift in food shopping habits to make household incomes stretch further.
There may also be signs of a shift in the travel and tourism sector based on fewer people taking holidays abroad and instead having “staycation”. This is something I shall be exploring in a focus on the sector later this month although there may be other factors at play here as well.
Clearly, though, the pressures outlined in this blog on household incomes would suggest that unless things change to improve our national economic prospects there may be a longer-term shift in consumer spending habits.
Those businesses that rely on consumption should not assume this is a temporary blip.
Given the changing circumstances it will be essential for those of you in this sector to review and adjust your business models, your marketing plans and your products and services in order to safeguard your business for the future.
Stop press: it remains to be seen what effect today’s Bank of England Interest rate increase, from 0.5% to 0.75%, will have on consumer spending but it is likely to affect all those with variable or tracker rate mortgages making disposable household income even tighter.

Business Development & Marketing Cash Flow & Forecasting Finance General

Insolvencies: business failures slowing but individual insolvencies climbing

individual insolvencies rise signalling storm clouds overheadI generally concentrate on the quarterly insolvency statistics for businesses since my blogs are designed to help SMEs.
However, there has been a worrying trend in the numbers of individual insolvencies and in the latest quarter’s figures, from April to June 2018, released by the Insolvency Service they had reached their highest level since the first quarter of 2012.
This could have implications for businesses, especially those that depend heavily on consumer spending.
Company insolvencies for Q2 2018
While company insolvencies are still higher than they were in the same quarter in 2017 decreases in compulsory liquidations, administrations and underlying creditors’ voluntary liquidations meant that the underlying numbers of insolvencies had decreased.
Total company insolvencies for April to June decreased by 12.4% compared to the first quarter of 2018 while the underlying number of insolvencies decreased by 2.0%. However, insolvencies were still 12% higher than for the same quarter in 2017.
The construction industry and the wholesale and retail trades still top the list of failing companies as has been the trend for some months.
During the first half of 2018 there were 196 CVAs which is hardly any increase on the 171 CVAs in the same period of 2017. I suspect a large proportion of these were accounted for by retail businesses looking to reduce their rent as evidenced by the high-profile examples we have been reading about in the press.
Individual insolvencies for Q2 2018
The numbers for individuals getting into financial difficulties are noteworthy, because they have been steadily increasing since 2015 and sooner or later are likely to impact on SMEs as mentioned above.
IVAs (Individual Voluntary Arrangements) reached a record high between April and June and individual insolvencies increased by 4.4% in this quarter when compared with January to March 2018.
It may be that a combination of factors is at play here, in that prices have been rising since the EU referendum vote as the value of £Sterling against other currencies has plummeted, making imports more expensive, while wage growth has been slow and the proliferation of low-skill, low-wage employment or uncertain zero-hours contracts has put pressure on individual finances. Also access to credit is becoming more difficult as regulation has begun to restrict loans to those who cannot prove their ability to repay debt.
This month’s key Indicator will explore all this in more detail when the focus will be consumer spending and potential changes in spending and saving habits.
I hope it will provide useful insights for you as SMEs.

Accounting & Bookkeeping Banks, Lenders & Investors Cash Flow & Forecasting Finance Rescue, Restructuring & Recovery Turnaround

The latest insolvency figures reveal a worrying trend for some businesses sectors

Road sign to liquidation or insolvencySMEs in the supply chain sectors that particularly rely on consumer spending should pay heed to the latest insolvency figures, for January to March 2017.
While the figures released by the Insolvency Service at the end of April show a relatively small increase by 4.5% compared with the last quarter of 2016, the trend has been upwards now for three consecutive quarters.
There were 2,693 Creditors’ Voluntary Liquidations, 68% of 3,967 total insolvencies for the first three months of 2017, affecting particularly the construction and the wholesale and retail sectors.

Consumer confidence, inflation and import costs

As higher prices, particularly for food, have started to feed through into the shops, there have been signs of a weakening in consumer confidence and a slowdown in spending.
While the “headline” story since the New Year has been the demise of 28 large retailers including Jaeger, Agent Provocateur, Brantano and Jones Bootmaker, the implications are clear for those businesses involved in the wholesale supply chain, many of them relatively small SMEs.
Both KPMG and Begbies Traynor, have been monitoring the trends for companies in what they call “significant distress”.
Analysis by KPMG of notices in the London Gazette reveals that the numbers of companies entering administration are still relatively low, however Blair Nimmo, head of Restructuring, has identified a “steady creep in numbers that we’ve witnessed over the last 12 months”.
Begbies Traynor’s Red Flag Alert research for the first three months of 2017 has identified an increase in companies in distress, up by 26% on average over the past year in key sectors of the consumer-facing supply chain, with the Industrial Transportation & Logistics businesses up by 46%, the wholesale sector up by 16%, and the Food & Beverage Manufacturing sector up by 15%.

How do SMEs survive the growing insolvency headwinds?

Given the higher costs of raw materials imports due to the devaluation of £Sterling since the EU Referendum result, businesses will not be able to absorb all these costs and will have to pass them on to customers. This in turn is likely to reduce income for UK focused SMEs and lead to greater pressure on those that have high fixed costs.
As ever, it pays businesses to ensure they are as lean and fit as they can be and that means scrutinising their costs and reducing them wherever possible.
Regular monitoring of cashflow may reveal opportunities for cutting fixed costs and introducing efficiencies, for example outsourcing transport or automating activities such as accounting and invoicing. Another critical area for SMEs is to improve cash flow such as introducing more rigorous follow-up on late payments, and invoicing as soon as possible. Close attention to credit control and collaborating with other small suppliers can also help when dealing with larger customers and getting them to pay on time.
Above all, potentially vulnerable SMEs should not wait to get restructuring help and advice. An objective eye sooner rather than later and before a business is in crisis can make all the difference to survival.

Banks, Lenders & Investors Business Development & Marketing General Turnaround Uncategorized

Can there be morality and ethics in business?

Ever since the Great Recession began in 2008 there has been an understandable focus on the moral and ethical behaviour of banks and other financial institutions – or the lack of it.
However, there has been a wider discussion rumbling along since May, when a conference was held in London on so-called “inclusive capitalism” where discussions touched on the so-called social contract of common values that tacitly exists in the market , whether it is in finance, business or government.
This theme has since been taken up in comment pieces, including Anthony Hilton in the London E Standard, reflecting on the ways in which businesses can treat customers unfairly, without it being obvious, for example instead of a price increase the manufacturers change the shape of a package or reduce its size to sell less for the same price.
His question was whether the responsibility for such behaviour rested with a company’s board of directors, with its CEO or managers, or with regulators to ensure fair dealing.
More recently Lord Digby Jones weighed into the discussion, arguing that the relationship between government, businesses creating wealth and society was broken. He put forward the notion of a business covenant, like the military covenant, that might set out simply and clearly the obligations of a business to its customers and its community, and what business might expect from government as part of the covenant.
Covenants, while not legally binding involve a clear statement of intent as to how the parties should deal with each other.
Despite the caution “caveat emptor” an economy and society can only function effectively when consumers and clients trust the businesses that supply their goods and services.
While consumers also need to take some responsibility for their purchasing and financing decisions, inclusive capitalism relies on there being a level of confidence that customers will be treated in a moral and ethical manner by those institutions, financial and commercial, that supply them.