The impact of the cost of living crisis on the retail and hospitality industries has been laid bare by a new survey showing 59% of people have cut their spending on eating out and 51% have cut spending on clothing.

• Most people would now save rather than spend an extra £500 as more see value of ‘rainy day funds’
• ‘Everyday’ expenditure now seen as ‘luxury spending’
• Energy bills one of the biggest reasons to cut spending

The survey of 2,000 people across the UK, The Great Squeeze, highlights that consumer spending that traditionally goes to online retailers and high street businesses, such as eating out, clothing, alcohol, luxury goods and household items are those that consumers cut the most as the cost of living crisis worsened.

Robert Catherall, Principal at Oxera, says that there are signs of pressure on high street businesses in the number of insolvencies that have taken place over the past year.

In the past 12 months*:

• Insolvencies of retailers have risen 56% from 1,243 to 1,942
• Insolvencies of restaurants have risen 45% from 1,324 to 1,916
• Insolvencies of pubs and bars have risen 64% from 366 to 602

Says Robert Catherall: “The cost of living crisis was always going to result in people cutting their spending but it’s shocking to see just how hard the retail and hospitality trades have been hit.”

If the cost of living crisis continues to worsen by factors such as a rise of mortgage rates, further financial strain will be placed on homeowners and renters, particularly in the autumn when people rely more on gas and electricity. In this case, it’s likely that consumers will cut their spending on retail even further, resulting in a harder hit for the industry. Given these predictions, businesses would benefit from staying close to the evolving economic situation they are currently facing.

With these predictions, businesses would benefit from unpicking and understanding the data and frameworks designed to help them map and monitor the evolving economic situation they’re facing.” 

The survey’s findings also show a sharp change in what goods and services people perceive to be luxuries:

• 81% now perceive eating out to be a luxury compared to 71% 18 months ago
• 72% now perceive recreation and culture to be a luxury, compared to 58% 18 months ago
• 63% now perceive alcohol and tobacco as luxuries compared to 52% 18 months ago
• 45% now perceive personal care such as haircuts as a luxury compared to 33% 18 months ago

Oxera’s new survey also shows that if given an extra £500 per month, 70% of people would choose to save it, compared to just 16% who would spend it.

Dr Helen Jenkins, Oxera Partner, says that the last three years have demonstrated to people the importance of having a ‘rainy day fund’ when they may not have previously needed to have one. More now recognise the importance of saving money, if they are able to.

Says  Helen Jenkins: “It was difficult for a lot of people to see the importance of a ‘rainy day fund’ during the 2010s when the economy was relatively buoyant. In contrast the last three years have been nothing but rainy days for many people, including people who have not faced these challenges before.”

“More people are now preparing for financial shocks far more than they used to. The fact that 70% of people would choose to save an extra £500 per month also suggests they are anticipating further financial stress in the coming months and years.”

Energy bills one of the biggest reasons to cut spending elsewhere

Oxera’s survey found that the biggest reason for people to cut their spending was to pay energy bills, with 22% of people saying they have done this. Only spending on pets (23%) and childcare (26%) benefitted more from reduced spend elsewhere. 16% of people also said that they now perceive spending on energy bills to be a luxury.

One of the key findings of the survey is that people tend to use ‘mental accounting’ – mentally dividing their spending up into ‘pots’ to manage their outgoings and avoid overspending. When prices rise in a certain pot, people who use mental accounting then reduce spending in that pot, rather than elsewhere. Mental accounting is a useful rule of thumb to help manage our money, but it does mean that people aren’t fully ‘optimising’ their spending in the round. Mental accounting has implications for businesses as they raise prices.

Says Robert Catherall: “The cost of living crisis has forced most of us to look hard at where we spend our money, and cut in some areas to spend in others. What you see here is the areas where people prioritise their spending – their ‘ring-fenced’ spending like energy and childcare.”

“It’s worrying to see that one in six of us now see using gas and electricity at home as a luxury. ‘Heat or eat’ isn’t just a catchphrase – it’s the reality of life for people.”

Further findings of Oxera’s survey include:

• 57% of women  have cut their spending on clothing in comparison to only 43% of men
• 75% of people living in the North West are the most likely to cut spending on luxury goods even further, compared with only 49% of people in London and 34% in the South East
• 77% of people aged 65+ are the most likely to save an extra £500, in comparison, only 65% of people aged 31-44 would save it
• People are least likely to cut spending on their pets with only 16% having done so. Only 10% would be willing to cut spending on their pets in the future, with people in the South West most willing to do so

The full findings of Oxera’s study The Great Squeeze are available online here.

* Source: The Insolvency Service. 12 months to year end April 30 2023