Festive predictions 2023

A bleak festive season or a late surge?

Last year we saw a return to the first ‘normal’ Christmas for some time. And while consumers told us they were looking to cut back significantly, our Festive Predictions 2022 suggested there might be a late surge in spending that would outperform the survey results. Thankfully for many, that came true.

This year, it could be more of the same as customers again reveal they’re looking to tighten belts.

We expect Christmas spending on presents and celebrations to fall from £23 billion to £20 billion, or by about £40 per person. That decline equates to around 13%, and will see almost every demographic group spending less, with the majority blaming cost-of-living pressures.

Our latest Consumer Sentiment survey showed a decline in confidence over the summer across all ages and demographics, with the exception of the oldest and the most affluent. Even though interest rates and inflation are beginning to ease, mortgage renewals and rent rises are hitting personal finances for the first time, while prices of goods are still increasing, albeit at a slower rate. In response, more people started shopping earlier, especially young people, but either for bargains or to spread the cost, rather than because they were being more organised.

Consumers tell us they’re looking to spend less on everything. Though they intend to prioritise food, drink and Christmas dinner, there’s a net negative spending intention across all categories.

But retailers shouldn’t brace for disappointment just yet - we think there’s a good chance people will spend more than they say.

Last year, consumers told us they planned to spend around £20 billion in the run-up to Christmas. At the time, this was another disappointing forecast. In the end, however, they spent 15% more: £23 billion. The trend this year could be similar to last.

There are other positive signs, too. Since September, those saying they plan to spend less have fallen from 30% to 18%, suggesting people are starting to feel the benefits of lower inflation and improving real wages. Combined with consumers prioritising spending on special occasions, fewer of them spending on Black Friday, and the prospect of a higher National Living Wage and lower National Insurance Contributions as announced in the Autumn Statement, there’s a real chance of a late surge - particularly given that most people are planning to buy the majority of their presents in the first two weeks of December.

Overall spending predicted to decline, but will this happen in reality?

Lower spending per head - combined with an increase in people suggesting they won’t spend at all - has seen the total predicted spending on Christmas presents and celebrations fall by £3 billion.

Christmas presents & celebrations spending, 2019-23

Excluding the year impacted by lockdowns and tier restrictions, this is set to be the lowest overall spend in five years.

Unsurprisingly, household finances are the main reasons for consumers telling us they plan to tighten their belts, with the top three reasons being having less money to spend (48%), tight personal finances (43%) or having less confidence in their personal finances (30%). However, fewer respondents raised cost of living and financial pressures than last year, despite the fact that inflation is lower this year.

These tight finances are also affecting when people will spend. In our Consumer Sentiment survey, 20% of people told us they had already started Christmas shopping in mid-September. When we re-asked the question in October, slightly more said they would buy earlier (15%) than later (9%). Younger people indicated they were planning to shop earlier in order to bag bargains or help spread the cost, and these findings were particularly pronounced in under 25s, where one in three intended to shop earlier.

Yet, while many of these trends feel similar to 2022, there is one important distinction. Last year was the first normal Christmas without the Omicron variant circulating, and with no international travel restrictions. Previously, family gatherings had been cancelled or had numbers limited, so being able to get together again was more celebratory. Christmas spending was boosted by more family gatherings and more international travel - consumers bought for more people and spent more heavily. Although people’s plans for 2023 are similar, there may not be the same uplift as last year.

Consumers to prioritise celebrations and presents

Much like last year, every category has a net negative spending intention (i.e. more people spending less this year than spending more).

Planned Christmas spending by category vs last year, 2023

Food, drink and Christmas dinner remain priorities for consumers. But a marginally negative spending intention suggests we might see the continuation of volume declines we also predicted last year. As ever, though, it remains to be seen whether the intention translates to reality.

We expect similar themes to last year including self care (health and beauty) and self treating (accessories). Also consumers will look for value (trading down but selective treating), practical gifting but with a hint of fun (think Lego and Barbie) and affordable decoration rather than big-ticket. We also expect second hand and home-made to continue to grow. Elsewhere, with Christmas bookings up for restaurants, it may be a strong season for hospitality.

But, generally, consumers are chasing less frivolous spending. On the whole, they’re looking to spend less on themselves and on the home, reserving finances for celebrations and presents for others. Electricals, tech and home products are lower priority, though this is perhaps expected as they saw strong sales throughout the pandemic while consumers were spending more time at home.

Interestingly, there’s a huge variation between age groups, as the youngest shoppers look to shop for themselves - prioritising fashion, beauty and leisure over food and gifting. More of a desire to dress up and party!

What might Christmas really look like?

So, the bad news is that people predict they’re going to spend less this year. But there’s a strong possibility this won’t happen.

Not only is this a similar trend to the one we saw last year, which exceeded expectations, but our data also shows Christmas spending intentions have already improved since September.

In our Autumn Consumer Sentiment survey, almost one in three (30%) told us they were expecting to spend less than last year. In just a month, that figure has fallen to one in six (18%). This suggests people are already getting into the festive spirit and preparing to spend either the same as last year or more than they originally anticipated.

Last year, predicted overall spend on Christmas presents and celebrations was £19.7 billion (£393 per person). In January, our Retail Outlook revealed the actual spend was 15% more than they had predicted - £22.8 billion (£437 per person). This year, the predicted spend is a remarkably similar £19.8 billion (£404 per person), not only suggesting people struggle to accurately predict how much they will spend at Christmas, but raising hope that they may spend as well as they did last year.

Even more encouragingly, despite the forecast decline in overall spending, intentions are actually more positive across most categories than in 2022. Last year, people were struggling with personal finances, blaming record inflation and the cost-of-living crisis. These latest findings suggest people are starting to feel the benefits of fading inflation and wage increases.

Net spending intention by category over Christmas vs previous year, 2022-23

Another factor suggesting spending might be higher than predicted is the sharp decline in the number of people spending in the Black Friday sales this year, albeit that some retailers reported better-than-expected trading over the weekend itself. With interest in the event dropping from 61% in 2022 to 44% in 2023, only 16% say they will ‘definitely buy’, and anticipated spending falling from £7.1 billion to £5.6 billion, are consumers keeping their powder dry for Christmas?

We know that people shop later than they think. Over the last six years, while consumers tell us they plan to start their shopping earlier, the reality is that most of the buying is happening later. We’re seeing increasingly fewer people doing their shopping in November, with the majority of people planning to do most of their shopping in early December. More than half are yet to do most of their shopping.

When will you do most of your Christmas present shopping?

Encouragingly for everyone, the later Christmas shopping takes place, the better macro economic indicators get, with lower inflation and higher earnings.

CPI vs real earnings growth

The trajectory on inflation and on wages are continually getting better, as are the latest figures on real earnings growth. While it has been positive since the summer, it's now getting continually better with inflation falling rapidly. And consumers will start to feel the benefit, with more disposable income in their pockets just in time for the festive season.

The recent Autumn Statement is also likely to give consumers a late boost in the Christmas run-in. With a National Insurance Contributions cut from January, increases to the National Living Wage, retention of the pensions triple lock pensions and a benefits uprating from April, there’s a sudden prospect of higher take-home income for many. This uplift in disposable income could provide retailers with a much-needed boost at the right time of year.

With nearly half of all consumers this year intending to buy in the first two weeks of December, household finances improving, and the last-minute news from the Autumn Statement, the best might be yet to come for consumer-facing businesses.

How does this affect consumer-facing businesses?

It’s clear there’s some tension between the financial situations of consumers and their desire to make Christmas special. While retailers need to be alert to economic pressures on individuals, they also need to think about how they can help them get the best from this scenario.

While spending appears to be dampened, there’s plenty of evidence to suggest consumers will outspend their predictions. For consumer facing businesses, this means being prepared for a late run on products. That might mean carefully maintaining margin in the run up to Christmas, particularly being cautious around promotional activity over Black Friday before returning to full price at the right time, and ensuring careful stock management to balance potentially higher demand with a need to avoid overstocking and a heavily discounted post-Christmas period.

This might be harder in some product categories than others. For many, it might mean re-orienting to customers who are either more confident in their finances, such as older or more affluent consumers, or those who are keenest to spend on themselves, such as under 25s.

Much like last year, some might approach uncertainty by looking to reduce costs and scale back investments, but cutting investment arbitrarily cannot be a long-term approach. These types of trading conditions can be a good opportunity to accelerate renewal, particularly for those that take a strategic approach to investments.

For those unable to invest or find investment, being agile, resilient and responsive can not only set yourself up for future success but be ready to capitalise on any last minute spending.

Ultimately, however, with some positive indicators such as spending intentions moving in the right direction at the right time and the Christmas rush still to come, retail and hospitality operators will be hoping this year’s Golden Quarter brings them some much needed festive cheer.