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The Challenge Of The Consumer Market

Read our article to determine how to benchmark your business against UK consumer confidence.
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Dean

Introduction

Consumer confidence is a key economic factor that directly influences business turnover. 

It is an important metric that is assessed through wide-ranging surveys carried out by large organisations and measures the degree of optimism consumers feel about the overall state of the economy and their personal financial situation.

When consumer confidence is high, consumers are more likely to make purchases, leading to increased business turnover.

Conversely, when consumer confidence is low, consumers tend to save more and spend less, which can negatively impact business turnover.

The chart below shows UK consumer confidence as measured by GFK Group International with a basic long-term trend analysis.

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What this shows, is a graphical representation of a consumer sentiment survey that addresses their financial security & their willingness to spend money on non-essential goods and services.

Consider this carefully for a moment.

Unless you are a minority of businesses that are focused upon absolutely fundamental goods and services (such as electricity or water – meaning your turnover probably remains relatively static), you are very likely to be sensitive to this metric of consumer sentiment.

Therefore, your income is likely to track this metric to one degree or another.

Consumer Confidence & Business Turnover

When consumers feel confident about their financial situation and the broader economy, they are far more likely to spend money and make major purchases beyond just the essentials they need to purchase for their day-to-day needs.

This increased spending can lead to higher sales volumes, improved profits, and more growth opportunities for grassroots businesses. This in turn drives improvements for business conditions in the overall economy.

On the other hand, when consumer confidence is low, consumers tend to cut back on their spending and pivot to defensive positions such as saving more of their income and moving from making major purchases to focusing on essentials. 

This can lead to reduced turnover, lower profits, and potential business contraction. 

On the large scale, this is fundamentally where recessions come from.

This makes consumer confidence a significant factor that helps to drive the overall economy. 

Therefore, understanding and monitoring consumer confidence can provide businesses with valuable insights into potential shifts in consumer spending behaviour, their own business performance and their prospects.

The GfK Consumer Confidence Index

One tool that businesses can use to gauge consumer confidence is the GfK Consumer Confidence Index (which can be viewed here courtesy of the Trading Economics Foundation).

The GfK Consumer Confidence Index is a widely recognized tool for measuring consumer confidence.

It is based on a monthly survey of around 2,000 consumers and provides a measure of their confidence in the economy, their personal financial situation, and their willingness to make major purchases.

The index provides a score that occupies a scale from -100 to 100, with a score of 0 indicating neutral consumer confidence. 

A positive score indicates that consumers, on average, are optimistic, while a negative score suggests that consumers are pessimistic.

Using the GfK Consumer Confidence Index for Business Performance

Businesses can use the GfK Consumer Confidence Index as a barometer for judging their business performance & prospects. 

A rising index suggests that consumers are becoming more confident and are likely to increase their spending. 

This could signal potential growth opportunities for businesses, particularly those in consumer-facing sectors such as retail, hospitality, and leisure.

Conversely, a falling index suggests that consumer confidence is declining. 

This could indicate a potential downturn in business turnover, as consumers are likely to cut back on their spending.

Businesses can use this information to adjust their strategies, such as focusing on cost control and efficiency measures during periods of low or falling consumer confidence and pivoting to investment and aggressive marketing strategies when consumer confidence is high & rising. 

Moreover, businesses can use the index to benchmark their performance against the broader economy. 

If your business turnover seems to track consumer confidence very closely, then your business will be very sensitive to overall consumer confidence and its performance will be very closely correlated to the overall economy. 

This is equivalent to what investors term “beta” or roughly market-tracking returns.

If a business’s turnover is increasing or remaining stable while the index is falling, it may suggest that the business is outperforming the broader economy.

This is equivalent to what investors refer to as “alpha” or market-beating returns and a high level of alpha usually signifies a very well-run and resilient business.

Conversely, if a business’s turnover is falling while the index is rising, it may indicate that the business is underperforming relative to the broader economy.

Quite simply, this suggests that the business’s owners may not be running the enterprise in an efficient manner.

In this case, the business and its owners should rethink their positioning with respect to branding, marketing and the other customer-facing aspects of their enterprise to be more attractive to consumers.

Conclusion

Understanding consumer confidence and its impact on business turnover is essential for businesses. 

The GfK Consumer Confidence Index provides a valuable tool for businesses to gauge consumer sentiment.

By closely monitoring this index, businesses can adjust their strategies accordingly to being more aggressive with discounting and more fiscally conservative when consumer confidence is low, to pressing more high-end options and more fiscally aggressive when consumer confidence is strong.

It will allow business owners and managers to anticipate changes in consumer spending behaviour, allowing them to make informed decisions that will help drive growth and profitability.


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Dean Benton

Dean is EZWebs founder and a long time business & technology wonk.

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