Our latest Regional PMI survey indicated a positive end to 2023 for businesses across most areas of the UK, after a rollercoaster year in which interest rates reached their highest for well over a decade and wage growth accelerated to new heights.

Our SME Purchasing Managers’ Index also found business activity among SMEs expanded at the fastest rate for seven months in December, led by renewed growth in the service economy.

Although there’s a sense of momentum as we start 2024, our Retail and Leisure Report with Retail Economics reveals businesses in the retail, leisure and hospitality sectors continue to face a complex landscape this year.

Rather than cancelling spend altogether, consumer behaviours are continuing to evolve as households look to mitigate financial strains, for example, by trading down or spreading costs. UK consumers are most likely to boost spending on essentials like energy, home-cooked food, and transport in 2024, as well as holidays and household services while discretionary spending on items like electronics and takeaways is likely to take a backseat.

Consumer-facing businesses need deep insight into the household behaviours currently impacting the economy as the landscape evolves at pace. Our research cuts through the complexity, targeting the unique challenges and opportunities of shifting consumer behaviours.

1. Households poised to boost spending on essentials

UK consumers are most likely to boost spending on essentials like energy, home-cooked food, and transport, as well as on holidays and household services. Holidays have become a non-negotiable area of spending for many consumers and are increasingly considered a ‘necessity’ rather than a ‘luxury’.

2. Paying for sustainability

Younger consumers exhibit stronger personal responsibility to sustainable practices compared to their seniors. Nine in 10 consumers aged under 30 claim they are adopting sustainable behaviours in at least one major sector in a typical household’s financial basket, and eight in 10 say they would pay extra.

3. Wages and inflation rebalance

As inflation eases from recent highs and earnings remain resilient, 2024 is set to bring a slight improvement to household finances. While we anticipate a modest increase in real income for the average household (remaining below 1% through 2024/25), this marginal growth is unlikely to supercharge a consumer-led recovery.

4. Housing costs step up as interest rates remain elevated

Past interest rate hikes will continue to bite throughout 2024 as households renew fixed rate mortgages (around 80% of total mortgages) and private landlords pass on additional costs to their tenants. Those targeting spending among low-middle-income and middle-income homeowners are likely to feel the impact.

5. Higher returns on savings unlikely to offset cost of living

As businesses face dwindling spending and stagnant house prices, a trend towards cautious financial behaviour will emerge. Households will aim to maintain (or even boost) their precautionary savings. This trend is particularly pronounced among older consumers who are often mortgage-free with a different lifestyle focus.

The cost-of-living crisis has seen consumers adapt behaviours to counteract increased household costs – this will continue throughout 2024.

Middle and low-middle income households most likely grappling with greater housing expenses in 2024 are the least likely to drive volume spending across non-food retail, leisure and hospitality. There will be a continued focus on value from subdued real earnings.

Those facing mortgage or rent renewals over the next year are particularly downbeat about their personal finances, these being predominantly younger, middle-income households. For those with mortgages trying to manage the interest burden, 70% have made, or expect to make, adjustments to their mortgage agreement.

1. Sustainability

Understanding the difference between consumer behaviour, intention, and the gap in between is pivotal for targeting strategies. Our research identifies four key stages in the gap between intentions to be sustainable, and action, and there are clear differences by age:

• Concern: level of worry about sustainability across different categories
• Inform: desire to educate yourself about sustainable practices
• Action: efforts to live more sustainably, including switching to sustainable products and services (at no premium)
• Pay: willingness to pay a premium for sustainable products and services

The most significant gaps consumers report in their intentions is between a willingness to adapt behaviour (take action to buy second hand or reduce single-use plastic consumption, for example) and willingness to pay for sustainable alternatives (pay more for sustainably produced clothing or pay for premium recycling services, for example).

2. Generative AI and the tech revolution

Artificial intelligence (AI) and machine learning (ML) could herald a new era of consumer engagement and operational efficiency. AI has the potential to address challenges and enable organisations to achieve heightened efficiencies and consumer-centricity.

Now could be the time to consider leveraging AI even more to support your consumers and build operational efficiencies. Examples include:

• Forecasting in logistics such as route optimisation for last-mile delivery
• Faster, reliable delivery options to benefit consumers
• Sophisticated chatbot for query resolution
• Faster customer support for typical enquiries for consumers

3. Success hinges on seamless omnichannel integration

In the fiercely competitive worlds of retail, leisure and hospitality, customer journeys have evolved into a complex network of online and offline touchpoints. With attention at a premium, consumers need compelling reasons to engage with a particular channel – beyond transaction – typically based on convenience and experience.

The share of digital wallet payments in retail, leisure and hospitality is set to more than double to 39.7%. The data also shows smartphones and wearable devices will take centre stage in joining up consumer experiences.

When targeting younger consumers, consider offering connected experiences across a suite of mobile applications – including payments.

4. Disruptive business models

The diversity of business models taking shape suggests many organisations are unlikely to rely on just one model to drive greater relevance. There may be a mix of models operating simultaneously to capture a wider range of opportunities. The research highlights three key business models gaining traction:

Retail media

Businesses with access to customer data are now able to sell this information to media firms for real-time targeting across digital channels.

Dynamic pricing

Businesses are using machine learning to analyse customer data to optimise pricing based on factors such as demand, inventory levels and competitor pricing.

Direct to consumer

Shoppers are increasingly accepting Direct To Consumer options. Two-thirds (66.3%) of Gen Zs and Millennials have bought direct from brands and manufacturers in the past year, compared to just 28.5% of Baby Boomers.

5. Permacrisis

Among UK consumers in 2024, concerns centre around the UK economic outlook, climate change and the political landscape with an upcoming election. Regarding personal finances, consumers are predominantly worried about inflation, followed by lack of savings and a weaker economy.

Businesses need to be aware of ‘persistent pessimism’ and the evolving consumption patterns of households. This also provides an opportunity to forge new, relevant and deep relationships with customers as needs evolve across consumer groups seeking support in challenging times.

David Scott, our Head of Consumer Industries, says: “I’m delighted with this year’s report, which explores the complex topics likely to impact our sector in depth. It’s encouraging to see data suggesting consumers expect to spend more in 2024, while being increasingly savvy about where they allocate their money. And that travel and hospitality are high on the list when consumers are prioritising essentials.

“I hope the report encourages conversations, partnerships and positivity towards what we can all achieve in 2024 and beyond.”

Richard Lim, CEO, Retail Economics, says: “I'm delighted to partner with the bank in this essential outlook report for 2024. While the most intense period of the cost-of-living crisis has now passed, challenges are becoming more nuanced and multifaceted. These insights could help businesses navigate the intricate terrain of households grappling with debt, against the backdrop of low-middle income households facing heightened financial pressures.

“It’s more important than ever for businesses to remain agile, with a relentless focus on their customers while ensuring their proposition remains relevant in today’s market.”