Asda seeing a change in shoppers’ mindset as spending power falls

FOOD retail has been one of the few big success stories on the high street during the downturn but customers are now behaving as if they expect the UK to head back into recession, according to the UK’s second biggest supermarket Asda.

The Leeds-based company’s authoritative Income Tracker survey has unveiled a number of worrying new trends as families rein back spending on fears about the future.

In January, family spending power fell by £9 a week, the largest fall on record and the second record-breaking month in a row.

The average family had £174 a week to spend in January, down nearly five per cent on the £183 weekly spend over the same period last year.

Andy Clarke, Asda’s chief executive, said: “The latest drop in household spending power reflects what we’re seeing in our stores – customers making each pound count.”

Rob McWilliam, Asda’s commercial finance director, said that Asda is seeing evidence of a change in customers’ mindset.

“Pre Christmas people were thinking there was a possibility they might fall on hard times, but they’d probably be ok,” he said.

“The mindset shifted into 2011, as what was once deemed possible is now deemed as probable. It is starting to affect their behaviour.”

He added that customers tend to change their behaviour in anticipation of an event rather than waiting for it to happen.

One way they do this is to set limits on expenditure in certain areas.

This is most apparent in spending on petrol where customers are buying a set amount of petrol in multiples of £10 instead of filling up their tanks.

Asda said that more than one in three shoppers are buying petrol in multiples of £10, up from a historic average of one in five.

Another area where they are showing their anxiety is “hope over adversity” purchases of lottery scratchcards.

Asda said that scratchcard sales show a direct correlation to people’s anxiety about their future.

“Customers are looking for an escape,” said Mr McWilliam. “During the 2008 banking crisis scratchcard sales peaked, but then fell back. We are now seeing scratchcard sales head back in the direction where they were two years ago. It shows customers are worried.”

Asda said scratchcard sales rose six per cent in the last year.

Mr McWilliam dubbed his third measure as: “The kids are alright”.

“This measures the pressure on mum,” he said. “People cut back on adult clothing and a treat for Saturday night, but the last thing they cut back on is the kids.”

Asda has seen an increase in sales of children’s clothing over recent months as parents sacrifice their own needs to put their children first.

The fourth signal is people shopping for what they need on a weekly basis rather than stocking up or buying in bulk.

This is particularly noticeable in areas such as cleaning products, where people are ignoring buy one get one free deals and opting to buy smaller packs to free up cash.

“There might be less in the cupboard, but there could be an extra special item,” said Mr McWilliam as people buy themselves an affordable treat.

Asda is warning of a “perfect storm” hitting the UK economy as consumers worry about losing their jobs at a time when petrol and food prices are rocketing and mortgage and utility bills are also on the increase.

With ongoing disruption to oil supplies through Egypt and strong demand from emerging economies, the price of crude oil put pressures on petrol costs in January.

In addition, VAT rose to 20 per cent on January 4 and earnings growth has remained sluggish.

Asda said that the factors that caused its Income Tracker to fall in 2010 have persisted into 2011 and are likely to continue over the short term.

Transport was the largest contributor to the headline rate of inflation in January, which remained the single most important element of consumer price inflation.

According to the AA, the cost of unleaded petrol rose 17.8 per cent between January 2010 and January 2011.

Charles Davis, managing economist at the Centre for Economics and Business Research, said: “With annual consumer price index inflation double the Bank of England’s target rate, while earnings growth remains modest, average households are seeing spending power sharply eroded.

“This trend is likely to continue into 2011, as inflation remains elevated and the labour market recovery lacks conviction.”

Mr Clarke added: “We’re conscious that we’re now seeing year-on-year declines in disposable income that reinforce our responsibilities to shoppers.

“These include holding back inflation, keeping prices low, and being at our best in helping them deal with whatever the economy throws at them,” he added.

As the UK’s second biggest supermarket warns of tougher times ahead, the cut-throat grocery sector is expected to get even more competitive.

Yesterday the UK’s biggest supermarket Tesco launched a £200m price war with rival Asda.

Tesco is lowering prices on more than 1,000 items from yesterday and promised to pay shoppers “double the difference” on products found cheaper at Asda.

Tesco and Asda are in the middle of an escalating price battle. Asda has been leading a sales growth revival with its Asda Price Guarantee, which it relaunched in January pledging to sell groceries at least 10 per cent cheaper than its major rivals.

Tesco’s new attack in the price war suggests incoming chief executive Philip Clarke, who takes over the role today, is keen to ensure Tesco retains its title as the UK’s most successful supermarket player.

His predecessor Sir Terry Leahy, who was knighted in 2002 for his services to food retailing, has overseen a leap in pre-tax profits from £750m in 1997 to more than £3bn in the group’s last set of annual figures.

Back at Asda the boss is warning of tougher times ahead, but believes the group is well placed to cope with the challenging market conditions.

“People are clearly worried about unemployment,” said Mr Clarke.

“We will see a change in the public sector. Job security is right up there in customers’ minds. Confidence will change this year, it’s going to be even more challenging.”

The UK’s leading food retailers have proved themselves to be remarkably resilient during both good economic times and bad.

Competition is cut-throat, but the leading supermarkets have managed to consistently increase their profits year on year and with big expansion plans in the pipeline, they will spearhead the creation of new jobs in the private sector.

While the next few months will be difficult, there is every reason to believe the supermarket sector will meet the challenges head on.