The Road to Prosperity: Understand consumer behaviour to preserve and grow value in your business

Tor Johnson

Who could have predicted that hand sanitiser would become the must have item for consumers around the world in early 2020? Seismic change has rocked the foundations of the consumer and retail sector and created real uncertainty for business leaders.

Whilst the temptation to batten down the hatches and concentrate on survival basics is strong, the changes in consumer habits that we’re seeing were not entirely unpredictable, rather they are an acceleration of changes already underway.

Those direct to consumer businesses already scanning the horizon for changing consumer behaviours pre-pandemic have since proven to be best able to withstand the storm of 2020. They are also the best positioned to seize opportunities going forward.

The importance of horizon scanning is well demonstrated by the recent high-profile failings of High Street giants Arcadia Group and Debenhams.

Whilst a devastating blow for the thousands of people employed by these businesses, there is no denying that these retailers were facing significant challenges pre-pandemic. Without going into detail on the range and scale of these ongoing problems, the challenges can be neatly summarised as an inability to stay relevant to their customer base and failing to provide a competitive online offering, whilst also shouldering the burden of high rents for retail spaces. These problems were not caused by the impact of lockdown, rather they were dramatically accelerated and escalated by it.

The acceleration of the changes in consumer behaviours that we are now seeing were already well underway long before the impact of lockdown decimated the already ailing high street. Obvious examples are increased levels of working from home and increased online shopping. With each passing month and based on the current climate, we can be confident that these behaviours are now here to stay, having become embedded consumer habits.

The long-term changes in consumer behaviour can be broadly categorised under the following three priority areas:

Spending more time on the things you want to do and prioritising time with friends and family.

  • The need to feel safe will remain important but the desire for experiences such as travel, dining, day trips and entertainment will dramatically increase as soon as restrictions allow for it.
  • Greater priority on the home and home products, including the ability to comfortably entertain those close to you at home.
  • Saving time through virtual retail platforms and home delivery. Consumers expect sophisticated online shopping platforms and fast deliveries for all goods from food, to apparel, to general purchases. The general acceptance of virtual services has increased across a range of different categories that previously heavily focused on physical retail spaces – examples include: pharmacists, vets and virtual car showrooms.
  • Spending less time commuting and in the office. Offices will not be the same as they were before. Inner city office based businesses will need to adapt, as will the on-the-go products designed to serve this customer base – do we still need ‘breakfast bars’ where we can eat on the way to work? There are also knock-on effects of this trend for example, informal apparel wear will remain far more significant as a category than formal suit or office wear.

Focus on wellbeing and health.

  • Wanting to exercise and stay healthy with varied home workout options.
  • Prioritising hobbies to aid mental health – now is the time for the dog purchase that seemed impossible with long days out of the house at work. The pet industry is just one example within this category that will likely benefit going forward.
  • Hygiene and cleaning products to keep our homes or workplaces clean.
  • Healthy eating and increasing home from scratch cooking, including products that simulate from scratch cooking but provide convenience

Improving and sustaining the environment around us.

  • Increased focus on the local community and ways to support this such as shopping locally. There is a huge opportunity for local high streets going forward.
  • Continued focus on sustainability. Our awareness of the impact we’re having on our planet is best illustrated this year by the engagement in and impact of documentaries such as Game Changers, Blue Planet and David Attenborough’s Life on our Planet. Issues of sustainability will continue to be drive consumer buying decisions, whether this be through plastic reduction, reduced meat eating, choosing slow fashion, buying second-hand or renting rather than buying single-use products.

The consumer priorities above demonstrate that determining future spend is not as simple as determining which consumer groups will have disposable income and which will not. The priorities will remain important to all, but the way in which spending will occur may differ between consumer groups. As we have seen in the recovery following the last recession, there will unfortunately be some who don’t feel the recovery and won’t have free cash available to spend as quickly as others, however, the priorities above will still be important to this group.

There is much debate on the anticipated profile of this recovery with many commentators, including Mintel, pointing to a “K” shaped recovery where there are real winners and those that are terminally left behind. No business will be able to sit back and expect to take a free ride on the recovery wave by feeding off what is happening around it. Instead it must directly address the priorities above.

Preparing your business for third-party funding or investment

For investors and potential buyers, businesses that have adapted to change, proven resilience and achieved growth during the pandemic are the most attractive. Though there will be strategic acquisitions of distressed businesses, we expect that these will be in the minority over the coming months. The high demand from private equity for resilient, high performing businesses, will make for a competitive market and direct to consumer businesses with proven models will command strong valuations.

Grant Thornton’s focus is working in the mid-market with business owners who live and breathe their businesses every second of the day. For those business owners now feeling the desire to pass the reins to someone else or wanting to de-risk their investment, what can be done to demonstrate to a third party that your business has successfully understood its customers, demonstrated resilience and is on the path to prosperity?

  1. Prove you understand your customers and how they make buying decisions
  • A good quality active customer database ideally with high levels of retention and ideally repeat ordering cycles
  • Quantification of the potential to attract new customers and the cost of acquisition of these individuals. This needs to be supported by strong marketing data and analytics
  • Profitable model with track record of growth
  1. Understand what makes you famous
  • Clear brand positioning to customers
  • Active online/digital following
  • Demonstration of brand engagement beyond this digital following
  • Differentiation from competitors and ideally demonstrable barriers to entry from new entrants in the market
  1. Show how you mitigate and manage operational risk
  • No reliance on one or a small number of individuals within the business (or a plan for how this might be reduced)
  • Limited, if not eliminated, potential for stock outs and disruption to sales
  • Limited potential for pressure on margins from supply chain changes
  1. Demonstrate your ability to scale and grow
  • Clear demonstration of market share acquisition or creation of own market
  • Infrastructure, systems, and processes are already in place to support growth, or if not in place, a plan for investment over the medium-term, rather than the immediate horizon