UK Consumer Impacts

It is the start of Autumn 2011.  All the early September indicators confirm that the UK economy is flat-lining in terms of growth, while inflation continues upwards on prices, unemployment increases, and there is a decline in the retail and services sector; and yet this is before the impact arrives of many of the UK government and local authority cuts.  All the evidence is of concern to us in the arts. 

For arts organisations facing the need to earn and raise more because of funding cuts, this looks daunting.  For arts marketers this presents a big challenge: how does this situation affect arts audiences and their attendances?  How do we respond to this economic climate?

It is intriguing to trawl through the various sources of socio-economic data and the snippets from various commercial research sources, official statistics, and the comments of forecasters about the years to 2015.  This particular blog is not political: it is about the impact on consumers and their spending, not about whether this results from right or wrong government policies.  It is worth noting that it is a global issue that the economic down-turn is impacting most on lower income families and the younger unemployed; it is a UK issue that cuts in benefits and the increase in VAT, amidst rising inflation in world commodity prices, most hit these relatively large groups of the UK population; and that the highest earning 5% of the population are least affected.  Retail and service sector sales figures are down, when, if they were to stay level, they would have to be up, because of the increase in the VAT rate; ‘big ticket‘ retail purchases are down most.  

However, I hope it is stating the blindingly obvious, not all consumers are affected in the same way or to the same degree, and this is very important in marketing to them.  

Take the decline in interest rates.  For those on mortgages, especially interest only, the long period of exceptionally low interest rates has given them considerable monthly savings, hundreds of pounds in many cases, largely protecting them, in the current term, from the increased costs from inflation and the VAT increase.  And these savings on mortgage costs are said to have injected billions of pounds into the UK economy.  They are projected to continue through 2012.  For those who have retired, particularly those who have taken early retirement from 55+, and relied on returns from their savings and shares, their income has been severely impacted by low interest rates.  This has created double jeopardy for them, from the increased costs from inflation and the VAT increase, and the falls on the stock market this August have removed the previous recovery reached in 2010.  This is said to have taken balancing billions out of the UK economy.

So it is probably useful to identify some socio-economic profiles and project the likely situation for each.  This is relying mainly on relatively crude profiling and inevitably stereotypical cohorts, with some overlaps of characteristics, some sharp contrasts within cohorts, and with some shared and obvious factors: detailed segmentation it is not.  There are multiple variables that can affect the situation, especially for those growing through life-stages where house purchase and employment prospects can have big impacts.  Those who perhaps over-extended themselves in borrowing in the house-price-boom are potentially surviving because of lowered interest rates, and they will fear any interest rate rise on top of increased costs and reduced income prospects.  Male employment in the UK has been falling, while female employment has been growing (and the reliance on double incomes), though female employment has the highest risk of variability (and is already at the highest unemployed level for 23 years).  Graduate unemployment is exceptionally high and stalling many career starts; youth unemployment is afflicting a generation of school-leavers.  

Since much of the socio-economic data revolves around earnings, it is useful to understand UK average earnings, drawn from the Office of National Statistics ASHE data:

Most people are surprised about how low average salaries are, especially in the top percentages of the population.  These are averages, and the regional averages are lower in the north and west, including Wales.  Self-employment is excluded. You can see why there is concern about the "squeezed middle".  Starting with the elderly, the situation is obviously complex:

·         The retired aged 75+ with either final salary scheme payments or annuity pensions purchased a decade ago, will be challenged by the increased costs of fuel, energy, travel, and general food price inflation plus the VAT increase.  They may be financially helping their adult children or their grand-children, so seeing multiple demands on their disposable income.  They will be most fearful about the costs of care in their declining years, and may still be trying to save to cover more eventualities.  Most will have down-sized in terms of their home so have little room for manoeuvre. They are still in the arts attender marketplace, but affected by mobility, times of performances, and accessible prices.  Key participants in family events, they are careful about their expenditure, and may have out-of-date views on prices.

·         There has been some largely unreasoning comment about the ”baby boomers” aged 55+ and the younger pensioners.  It is true many of them climbed the property ladder on the boom in house prices, but there were losers as well as gainers.  They are seeing the end of final salary schemes and when they retire the income from annuity pensions are at an all time low, while their “retirement funds” are hugely impacted by the low interest rates and by the falls in stock markets.  They do have the opportunity of down-sizing their home, but often with the need to move location, so their manoeuvrability may impact on their lifestyle. Like the older retirees, they may be financially helping their adult children or their grandchildren, so also seeing multiple demands on their disposable income.  They say this cohort is determined to “die before I get old” and “spending the kids inheritance” but it is also clear that many will be trying to save.  Some will be coping with terminal care for their aged parents. There is a wide range of variables in these people’s lives so it is difficult to be clear about average economic circumstances, but most will be in the bottom 75% of earnings (so under £31,000).  Fund-raisers will point out that these people are potential inheritors and may be making big decisions about their retirement, homes and wills.  They are clearly in the arts attender marketplace, and may be more open to new experiences.  For those that can afford it, they are said to be the age group most maintaining their expenditure on “luxuries” such as holidays and ‘big-ticket’ purchases, often at the start of retirement.

·         There is a sub-group of these who will be most affected by the impact of official rises in the retirement age, extending working lives.  Long term, the intention is to achieve 68 as the official retirement age, but in the short term the female retirement age rises to 65 (from 60+ rising in steps at present) by 2018, and then to 66 for men as well as women in 2020.  An estimated 330,000 women will have to defer their planned retirement dates.  Since the onset of retirement is related to lifestyle changes such as going-out more often, this deferral may impact on attendances.  It does of course give people slightly longer to save for their retirement.

·         There seems to be general recognition that those households earning more than £50,000 per annum and generally aged over 35 and well into “nesting” are actually the best off in the UK.  Remember these are only 10% of the UK population.  The Institute of Fiscal Studies projects this top 10% income bracket will see their income cut by up to 4%+ between January 2011 and April 2014 as a result of tax and benefit changes, but this falls mainly on the top 1% earning more than £100,000, especially if they earn above £150,000 and pay the 50p tax rate.  The low interest rates have given them considerable monthly savings, hundreds of pounds in many cases, largely cushioning them from the increased cost of inflation, rises in fuel and energy costs, and food prices as well as the VAT increase.  They may be saving defensively for when interest rates rise again or be paying down their mortgages.  They are concerned about local authority cuts, changes in the education system, and the prospect of increased competition for fewer and hugely more expensive university places.  Brought up to provide fully for their children, they worry about burdening them with huge debts to discharge over a lifetime.  (Commentators claim that households need £60,000 per annum to live in London.)  At the same time, they invest in their families, in holidays and out-of-home experiences, “family-friendly” events and seasonal activities and celebrations.  Similar to the ‘baby-boomers’, many are sustaining their life-style purchases, including luxuries.  This is an important group for arts attendances, but a very small proportion of the UK population.  It is Coalition policy that these people should contribute more to the arts through personal donations.

·         The group aged 45+, double-income, no kids at home are the people who are best off if they are on higher than average earnings; or decidedly worst off if they are on below average earnings.  And they could be supporting their student off-spring through university and/or supporting their elderly parents in retirement or terminal care, as well as facing the end of final salary pension schemes, so expected to invest much more in their future retirement, at a time when savings and stock markets are poor prospects.  Forecasters have said that those in this current cohort could be the most challenged ever of this age range, not escaping from their previous child and parental care costs, needing to save for their retirement, not benefiting from a rising house-price market.  New research (commissioned by Sainsbury's Finance) confirms the degree that the "Bank of Mum & Dad" is supporting their adult children.  A projected 13 million parents are estimated to have loaned £34 billion to their off-spring, down to grand-children.  Since this age range has long been recognised for ‘adopting” the arts at this life-stage and becoming concert-goers, theatre attenders, gallery visitors, etc. as well as more active participants, the challenges to them could impact on their engagement.  They are known in the past for ‘editing’ their consumption in recessions – cutting out say one attendance per annum, but not ceasing to attend.  They value “family events” and “special occasion” celebrations. This cohort is said to be one where some are cutting down on expenditure and focussing on needs and not wants, but others continue to want to boost their life-style.

·         Labour Party leader Ed Miliband caught criticism for describing some of the above as the squeezed middle, partly from not defining them clearly, and this continues to be a problem of definition.  We mostly know what they are not: not living in households earning over £40,000 per annum, unlikely to have children in paid schooling, not under 26 or retired, not necessarily able to afford full-time child care, not saving much on housing costs, squeezed by the rising costs of necessities, losing out on child-benefit, suffering most from structural unemployment.  These households often rely on the earnings of working women for viability, who suffer from variability in their employment, especially in the servicing and light manufacturing sectors; both sexes are threatened by unemployment and the challenge of who can be the principal earner.  These people are definitely cutting down on expenditure and focussing on needs and not wants.  There are a large proportion of the generally lower paid public sector workers in this group, whose pay is frozen and pensions are under re-negotiation, so they face long-term reduced circumstances through to retirement.  This is the largest proportion of the UK population.  In the various socio-economic segments these people appear in, they are core arts and entertainment attenders.

·         The Institute for Fiscal Studies (IFS) says the impact of the government's tax and benefit changes will be to slice 6% off the incomes of the least well-off 20% of households in Britain between 2011 and 2014. They will lose about the same from the cuts in public spending. No matter how well off you are, you notice a 12% cut in your income.  The IFS work divides households up into 10 groups ("deciles") in order to assess the impact of tax changes and benefit reductions. "Taking all family types together, within the bottom nine income decile groups, those with the lowest incomes are set to lose the most from these reforms as a percentage of income … Given that the annual welfare budget is being cut by £18billion, this is perhaps not a surprise."  Perhaps inevitably, the poorer of these are less frequent attenders, though the annual visit to family and community orientated events such as the Christmas pantomime and/or the special occasion “dinner and a show” can be part of their lifestyle.

·         Numerous changes will affect families with children: "Child benefit amounts are to be frozen in cash terms (a real cut) for three years: aggregate child tax credit spending is to be cut; the percentage of childcare costs that can be claimed by those receiving the working tax credit was cut from 80% to 70% in April 2011; the minimum weekly hours requirement for a couple with children to claim working tax credit is to rise from 16 hours to 24 hours in April 2012; and child benefit is to be removed from families containing a higher-rate (40%+) income taxpayer from January 2013".  The poorest 30% of households are especially hard hit: "Declines in living standards look set to continue until at least 2013-14.  This would mean that average living standards had not grown in well over 10 years, making it one of the worst decades for changes in living standards since at least the second world war." Children will put continue to put pressure on parents to take them to the “must see” films and shows, and, if affordable, some families will strive to sustain the pantomime, family and community events, and special occasion attendances.

·         Obviously, in this ‘squeezed middle’ group, is a large proportion aged 26 to 45 years old, some of whom are simply at a career and life stage en route to being better-off, but researchers point to them being hard-hit by a combination of government and local authority policies and cuts, global economic circumstances plus local recession, house price costs and potential house price falls, to introduce serious disruption to their lives and planned trajectories.  These are often “nesters” and need to commit to establishing homes and starting families, but they are being squeezed on mortgage lending and high deposit ratios in terms of moving up the property ladder; the forecast house price falls risk potential negative equity situations.  Because, overall, this economic group is also a large proportion of the UK population, including many with a high terminal education age, they do deliver a significant proportion of arts attendances, and are vital to “family-friendly” and children’s events.  They of course include a large number of singles, couples without children, and of couples waiting to start families ever later in their thirties.  They include the ACE Audience Insight “Fun, Fashion and Friends” segment who are potential attenders at a wider range of arts activities.

·         Defining the under 26 year olds in a cohort is always difficult. Focussing on those aged 15+ through to 26, they are experiencing the highest levels of unemployment for decades (almost one million in July 2011), reduced wage and salary levels, and real challenges in terms of starting careers, setting up home, even forming relationships – limits on disposable income hits at going-out.  For the better educated with better-off parents, we have a much higher proportion staying at home and in many cases studying at home by attending university locally.  After graduating, many are “under-achieving”: taking jobs for which they are over-qualified, on low earnings. Rising costs are impacting their available disposable income and they are ‘editing’ their consumption, reducing frequency, reducing spend, though they feel the need to maintain a going-out culture.  Indebted-ness here they come.  There is an argument that some arts organisations which always “lost” their young audience when they went to university, can now keep a relationship with them. 

·         For the young educational under-achievers, there are very few employment prospects, competition for jobs from better-qualified people and experienced European migrants, and they are expected by the benefits system to be constantly and continuously looking for work.  The removal of the EMA (Education Maintenance Allowance) hits poorer aspirant teenagers who want to stay in education.  If these are described as the “feral under-class” by some commentators, we at least need to understand their current lack of economic prospects and the trap they are in.  This group is said to be open to participatory activities if free or at near no-cost.

Having compiled the above, I attempted to relate these to the ACORN and Mosaic profiles of arts attenders, and the specific ACE Audience Insight profiles, though this is only going to be ultimately meaningful in the local and regional context for each arts organisation.  It is clear that the economic circumstances impact on the majority of those categorised as arts attenders.  Only the top earning few percent are likely to be relatively unaffected.   It did remind me, however, of how many arts attendances in the UK are actually drawn from the lower income groups in the population. 

Given that, it is worth pointing out that researchers and forecasters are unanimous that the flat-lining economy will most adversely affect the “north” of the UK, where in many regions (whole countries such as Wales) the “average earnings” are lower anyway, and town and city centres are already suffering.  So there are more people in those lower income IFS “deciles” in the “north” and west.  The forecasters are less than unanimous about whether the “north” is defined as north of a line from the Severn to the Wash, so including the Midlands, or whether the Midlands is in the “south”.  Reversing the point, they are unanimous that the south and south-east will bear the least impact from recession, though the disproportionate impact on lower earning groups will still apply, with, for example, commuting costs rising much more than inflation (5-8% on rail and tube fares).

We have had experience before of “recession” (defined as multiple quarters without growth) in both the 80s and the early 90s.  The Arts Council of Great Britain researcher Peter Verwey commented then that people in the industry said audiences were declining when in fact all the evidence was that it was attendances that were declining, because a large number of people had made a short-term small reduction in their frequency of attendance.  We could expect those making defensive cuts in household expenditure, paying down mortgages, defensively saving, to be ‘editing’ their frequency again.

However, expenditure on leisure travel and holidays is down for all the lower income groups (75% of the population), and the “staycation” phenomenon is widely reported.  It is said that the drop in short-stay weekend breaks away is replaced by going-out from home.  These could be opportunities to reach and retain audiences. 

One thing is certain, undermining concepts of value is not the way to attract people.  If they are allocating their spend from harder-pressed disposable income, they need to be convinced of the value.  The retail sector in the last two quarters has seen the declining impact of “up to 70% off” since the actual price to be paid and the value of the item to the purchaser needs to be relevant and the price affordable.  From my perspective, if you value your visit to an event, then you are unlikely to pay less for a cheaper seat to experience it in a less valuable way.  Families faced with the challenge of affordability may think differently, so multiple prices remain essential.

It would be interesting to hear from others on how best to respond to the consumers’ various circumstances in terms of pricing, sales promotions, and rewarding their loyalty.

Tough times.

Roger Tomlinson

Blogs as BrandinyourHand on Ning

Runs www.TheTicketingInstitute.com as a free information resource on ticketing, marketing and CRM

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