Spending Power Index - Experian

Spending Power Index - Experian
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Spending Power Index
Spending Power Index - Experian
White paper
                                                                                        Spending Power Index

                                                             Businesses often become laser-focussed on the specific
                                                             market segments that they perceive are most relevant
                                                             to them. And while this may seem a sensible tactic, it
                 By Amir Goshtai, MD, Experian               means the full picture and changing preferences of
                 Marketplace and Affinity                    other segments are not always taken into account.

                                                             We hope this report will help to address that, and
The world in 2018 is defined by data. Vast quantities of
                                                             give an understanding of trends that are prevalent
information flow through our lives like threads across an
                                                             across the nation.
elaborate tapestry. On a micro level, these threads bind
the business world together and stop it from                 In doing this analysis we’ve found some areas of
falling apart.                                               significant shift, such as the movement away from
                                                             owning possessions and towards spending on life
But more than this, once we zoom out onto a macro
                                                             experiences. Others have remained very much
level, they create a picture of the economy that is
                                                             consistent over many years, like the most powerful
colourful, detailed, and uniquely fascinating.
                                                             category we’ve identified, the Formidable 40s.
At Experian, we hold and manage large datasets,
                                                             We hope that decision makers reading this will gain
making us specialists in the handling and understanding
                                                             insight into ways they can adapt for success in what
of data - and in making sure it is used for the benefit of
                                                             is a changing and complex landscape.
consumers and businesses.
                                                             And more than this, we hope that anyone reading will
To create our Inaugural Spending Index, we have used
                                                             find these insights on the UK’s vast data tapestry just
this expertise to analyse a range of information about
                                                             as fascinating as we do.
incomes and spending to look at how people across
the UK are spending their money and how that’s likely
to change in the future.
                                                             "In doing this analysis we’ve found
Some of these insights have been surprising - and others
fit into social trends that are already well understood.
                                                             some areas of significant shift, such
                                                             as the movement away from owning
What’s most interesting about the report, though, is         possessions and towards spending on
the way these insights allow us to see long term trends      life experiences."
across segments of the market that inform us of the
changing preferences of people.

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                                                                                       Spending Power Index

What is the Spending Power Index?                           Macro model and the ONS Living Costs and Food Survey
                                                            to deliver the insights in this report. Further details are
For the purpose of this report we’ve defined
                                                            provided in the appendix.
“Spending Power” as a combination of key factors:

• Average income growth over time

• L
   evels of spending for one demographic group when
                                                            We have designed this report to be as
  compared to another                                       easily understood as possible, in terms
                                                            of naming the different categories.
• Levels of spending as a proportion of incomes
                                                            However, one that does require further
All of these insights have been drawn from Experian’s       explanation may be ‘Other Income’. This
modelled data using secondary sources, which we’ve          is comprised of income from a variety of
built over 20 years of work in the UK market. These         sources, including trade union benefits,
combined factors reveal a wealth of hidden information      income of children under 16, private
about income and spending.
                                                            scholarships, earnings as a mail order
Building the Index                                          agent or baby-sitter, regular allowances
We’ve built the report using information which has          from a non-spouse and allowances
been collected from the Experian Financial Strategy         from an absent spouse, and payments
Segmentation (FSS) tool. This data for the tool is taken    from insurance schemes (such as
from a range of publicly and commercially available         unemployment redundancy insurance).
sources, such as the edited Electoral Roll, the UK
Census and permission-based market research data
taken, for example, from the lifestyle questionnaires
                                                            It’s a varied category - and this variety has been
many of us complete. FSS is a proprietary consumer
                                                            considered carefully when drawing conclusions
insight system that uses this information to split the UK
                                                            about its overall impact.
population into 15 broad groups (FSS Groups), and 55
more detailed groups (FSS Types) based on likely shared     Then finally, on the self-employment income category, it
characteristics.                                            should be clear that figures given refer to supplementary
                                                            income, which may be on top of wages or salaries.
The income and spending information has then been
broken down into more detail by Experian’s expert team
of in-house economists, and combined with our UK
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Spending Power Index - Experian
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Spending Power Index

                       What you’ll see in the report
                       The report looks at income and spending levels
                       across seven years, broken down by generation, age,
                       and household type.

                       Income and spending levels are provided in both
                       absolute and annual growth rate terms. This includes
                       historical data from 2013-2018, and predicted data for

                       Absolute figures refer to amount in GBP per week,
                       unless otherwise stated. These are per household
                       figures, representing a typical household of that type,
                       and are nominal (ie. not adjusted for inflation).

                       The most recent data provides the most current view of
                       today’s consumer spending trends. The historical figures
                       serve both to benchmark these trends over time, and to
                       contextualise areas of specific interest.

                                     Grouping age demographics

                                     Gen Z                   Millennials
                                   18-25                     26-40

                                 Late Boomers                  Gen X

                                   56-65                     41-55

                                 Early Boomers             Pre-Boomers
                                   66-75                      75+

                       Our raw data gave stats for 12 different age categories,
                       ranging from the 18-25s to the 76 and overs. We’ve
                       bundled these up into categories that are loosely based
                       on traditional naming conventions. Where we’re talking
                       about specific data points, we also state the smaller
                       age bracket.
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                   Singles                                                                              Vocational

               High Earning                        Mid-affluence
                 Families                            Families

               State benefit                                                                              Mixed
                                                       Debt free
                  reliant                                                                                portfolio
                pensioners                                                                              pensioners

The different household types mentioned       Household Type                               Income min   Income max   Age min   Age max
in the report are, on a broad level, quite
                                              Singles                                       14,033      84,866       38        54
self-explanatory. For example, most of us
can understand fairly well what a ‘young      Young professionals                           35,777      36,013       33        34
vocational worker’ or a ‘high-earning         Young vocational workers                      17,607      17,607       31        31
family’ is.
                                              Benefit dependent families                    7,082       25,591       35        60
But in reality, breaking these down into
                                              Mid-affluence families                        20,324      54,931       29        59
distinct groups is not quite so easy.
                                              High earning families                         54,954      175,132      39        57
And this means there are some specific
                                              State benefit reliant
guidelines and data points we’ve used                                                       6,760       20,430       72        79
to categorise them, so as to be perfectly
                                              Debt free pensioners                          25,302      27,156       62        73
clear about how the delineations work.
                                              Mixed portfolio pensioners                    33,314      50,498       71        72
These are outlined on the table opposite.
                                             *See appendix for further info on FSS methodology

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       The Growth of Experience
      As retail spending growth slows, “experience
      spending” is on the rise
      Brits are increasingly choosing to spend their money on
      the ephemeral rather thanWorkers
                                 the material. Or, more simply,
                                                                               1.7%                        5%

       they want to do rather than own.

       This trend is evidenced in a few different ways, but most
                                                                         1%                           4%
       clearly in the differences between three categories:
       retail spending, lifestyle spending, and holiday spending.
                                                                              2%               3%
      Retail spending - or the amount  of money Brits are
      spending on buying goods – is estimated to grow by                            Retail
      an average 1.7% in 2019 Families
                                year-on-year. In comparison,
       lifestyle spending is projected to grow by 3.1% over the
       same year, and spending on holidays is expected
       to increase by 4%.

      By 2019, our model suggests retail spending will have
      seen three consecutive years of slowing growth - at an
                                                                              3.1%                         5%

       free of 2.9%, while holiday spending will have grown
      3.7% per year over the same period.
                                                                         1%                           4%
       Social Context
       These changes make sense when viewed in the context                    2%               3%
       of the broader sociological narrative.
       The movement away from buying things and towards
       buying experiences has been growing since at least 2014
       - when the notion was popularised by Cornell Professor
       Thomas Gilovich.

       In a 2014 paper, he said: “People often think spending
       money on an experience is not as wise an investment
       as spending it on a material possession.
                                                                                   4%                      5%

       “But in reality we remember experiences long afterward,
                                                                         1%                           4%
       while we soon become used to our possessions.

       “At the same time, we also enjoy the anticipation of
                                                                              2%               3%
       having an experience more than the anticipation of
       owning a possession.”1                                                      Holidays

       “In reality we remember experiences
       long afterward, while we soon become
       used to our possessions."

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Cross-generational Change
It would be easy to think that this change is being driven
only by the young. Millennials and Generation Z are often
thought of as being less materialistic than the rest of
the population, and much analysis is often biased by
the prevailing school of thought that says young people
value experiences more.

However, the data doesn’t bear out this analysis.

While it is true that Millennials are very much a part
of this trend - it’s actually happening across the

Holiday spending is set to grow fastest among people
aged between 41-45, at 4.9% in 2019. That’s compared
to 4.6% for those between 26-30.

The growth in holiday spending for the 71-75 and 76+
age brackets is predicted to be moderate compared
to the rest of the population in 2019 (at 2.2% and 2.0%
respectively). But this still represents a year-on-year
percentage increase for both categories - and they are                                             So what is the business world to make of this paradigm
both spending the highest proportion of their incomes                                              shift towards the experiential?
on holidays of the entire data set.                                                                In a world where you can buy the same goods online,
                                                                                                   stores are already considering what else they can
                     Holiday spending Growth - 2019                                                offer customers beyond a better, more exciting buying
                                                                                                   environment. Many are setting up new store layouts,
                                                                                                   payment schemes, and innovative in-store customer
                                                                                                   Some businesses are taking it further still - investing
                                                                                                   in partnerships to heighten the experiential element of
4%                                                                                                 a physical space,Salary
                                                                                                                        and further reduce the emphasis on
                                                                                                                              & Wages
                                                                                                   traditional retail transactions.
                                                                                                   One example of this is the partnership between WeWork
                                                                                                   and Samsung2, where the tech giant’s customer care
                                                                                                   centre doublesSelf-employment
                                                                                                                  up as a modern work facility, complete
                                                                                                   with high-speed internet and video conferencing


                                                                                                   In the marketing industry, experiential marketing is
                                                                                                   already seeing bigger gains than the rest of the field.
0%                                                                                                                    Other Income
                                                                                                   One report suggests 5.5% growth in the final quarter












                                                                                                   of 2018, where most other disciplines were in decline.

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                      Millennials: Breaking free                                                                               Our data suggests this phenomenon is growing in the
                                                                                                                               UK too. A recent global Deloitte survey4 showed it’s
                      The category that grew up with the disruptive                                                            not just that this cohort want to be free of the traditional
                      power of the digital age is now breaking free                                                            paradigm - they may actually define success by their
                      from the traditional employment and spending                                                             own levels of personal freedom. It suggested that 16.8%
                      model                                                                                                    of Millennials evaluate career opportunities by good
                                                                                                                               work-life balance, and 11% seek out workplace flexibility.
                      The drive for experience continues to be strong among
                      the Millennial age groups. But they are also seeing shifts                                               Millennials are now the majority of the workforce. They
                      in terms of their self-employment income. Increasingly,                                                  are obtaining increasing levels of income from their own
                      Millennials are shunning traditional models of salaried                                                  means, like self-employment and entrepreneurialism,
                      employment and retail spending, in favour of lifestyles                                                  and therefore becoming less reliant on monthly salaries
                      that offer more control over their time.                                                                 to survive.

                      Through 6%2018 and 2019, we forecast the Millennial age                                                         Predicted Millennial Income Growth - 2019
                      brackets will see an average 3.6% increase in their self-
                              5%    income.
                      Those aged
                                   between 31-35 are predicted to make                                                           Salary & Wages
                      £127.52 per week in self-employed income in 2019,
                      compared3% to just £104.72 in 2013.

                      “Other incomes”,
                                2%       the category comprised of a variety                                                   Self-employment
                      of different sources, including things like earnings as a
                      mail order   agent or babysitter, are also on the rise for

                      Millennials, especially at the oldest end of the bracket.
                                0%                                                                                                Other Income
                      We conclude those aged 36-40 will see a 7.9% increase















                      in “other incomes” in 2019. Only those in their 40s are
                      expected to see a bigger percentage increase (see page
                      9, The Formidable 40s).

                      Traditional wages and salaries remain consistent
                      but unspectacular. The expected growth of 2.6% for
                      Millennials is slower than either the self-employed or
                      other income growth mentioned above. This slow wage
                      growth is in line with the gains across all wage brackets.
                      For example, wages for the 46-50 age bracket only grew
                      by 2.7% in the same period - and the 56-60s registered
                      an increase of just 2.5%. All age groups are experiencing
                      slow wage growth - but Millennials seem to be taking the
                      most active steps to find alternative income sources.

                      What does the data mean?

                      American Millennials have been recognised as far more
                      entrepreneurial than previous generations, with a 2017
                      study3 showing 30% of millennials had already started
                      some sort of business, and 49% planned on starting one
                      sometime in the next three years.

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            The Formidable 40s: How early
            Generation X-ers became the engine
            of the UK economy                                             £1000

            The 41-45 age bracket earns, spends, and                                                                                41 - 45

            contributes more than any other
                                                                                                                                    36 - 40

                                                                                                                                    46 - 50

                                                                                                                                    31 - 35

            Perhaps the clearest signal provided throughout our                                                                      56 - 60
                                                                                                                                     51 - 65

            data analysis was the arrival of the ‘Formidable 40s’.
                                                                                                                                     61 - 75
                                                                                                                                     26 - 30

                                                                                                                                    66 - 70
                                                                                                                                    18 - 25

            The age bracket at the youngest end of Generation X                                                                     71 - 75

            has emerged as the real driving force behind the British                                                                 76+

            economy.                                                      £400

                is a trend noticeable     right  across Health
                                                        the spectrum of
Lifestyle                       Education     Housing

            income and earnings that we’ve studied. It is more
            pronounced in some areas than others, but the overall                 2013   2014   2015    2016    2017    2018   2019

            fact is clear - those sitting within and around the 41-45             Income growth chart per household per week
            age bracket are by far the most important sub-section
            of UK consumers.
                                                                          The Formidable 40s will be the highest earners in
                                                                          terms of both Gross and Net income in 2019, making
            The overall fact is clear - those sitting                     an average of £1,139.31 and £900.87 per household per
            within and around the 41-45 age                               week respectively according to our forecast.
            bracket are by far the most important
                                                                          This same age bracket has represented the highest
            sub-section of UK consumers.
                                                                          earning segment for every single year in our data set.
                                                                          So from 2013 up until 2019, those in their early 40s have
                                                                          and are expected to earn and take home the
                                                                          most money.

                                                                          The “Formidable 40s” net income is expected to grow by
                                                                          3.9% in 2019, the highest percentage of all age groups.

                                                                          This is also the only group making more than the
                                                                          entrepreneurial Millennials in self-employment income.
                                                                          The 41-45s are making an expected £155.09 per week
                                                                          from self-employment, compared to an average £127.57
                                                                          forecast across the Millennial age ranges in 2019.

                                                                          They also have the highest rate of “other incomes”
                                                                          growth of any age bracket - this is predicted to be at
                                                                          8.5% in 2019.

                                                                          As a result of their higher salaries, the 41-46 age bracket
                                                                          are contributing more in Tax and National Insurance than
                                                                          any other segment.

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Spending                                                    Impact
41-45s are set to be the highest absolute spenders of       41-45s, and their companions across Generation
any age group in 2019, as they’re expected to spend an      Xers in general, may well be the powerhouse of the
average of £785.64 per week. However, their expected        UK economy.
rate of spending growth, at 2.6%, is not the highest - as
                                                            Their levels of income, taxation contributions, and
there are four other age brackets anticipated to register
                                                            spending across almost all areas of the economy are
marginally higher growth going into 2019 (18-25s, 26-
                                                            in excess of every other age group. Likely factors include
30s, 46-50s and 56-60s predicted to grow at 2.7%).
                                                            a peaking career and a potentially growing family.
The 41-45s spend more on lifestyle and holidays than
                                                            What this data emphasises, though, is that all of this
anyone else - even Millennials. They are set to spend
                                                            combines to create an impressive group of people
£130.72 per week on lifestyle in 2019, and have been
                                                            that are at the peak of their powers.
the biggest spenders in this category across every
year we studied.

Likewise, on holiday spending, this group was the highest
spending sub-section across every year - and in 2019 we
think they’ll be the fastest growing, too.

They aren’t just driving growth in experiences, though.

This category is also contributing more than any other
group in the more prosaic (but nonetheless crucial)
areas of spending like transport, housing and education.
And, in fact, it is these areas they are arguably making
the biggest contribution - as they lead spending across
every year studied in every one of these three.

There are some signs, though, that this powerhouse
cohort might be slowing down. Growth in their spending
on these critical areas of the economy is still there but
the spending of some other age brackets - particularly
Generation Z - is growing faster.

In transport, the 41-45s are projected to see 1.9%
spending growth in 2019, compared with 2.1% for the 18-
25s; and in housing their spending is expected to grow
by 3%, whereas the 18-25s will see theirs grow by 3.5%.

This group also leads in home improvement spending,
and has the highest and fastest-growing level of interest
on unsecured credit.

What this data emphasises, though, is
that all of this combines to create an
impressive group of people that are at
the peak of their powers.

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          The Benefits Spending Trap                                    Impact
                                                                        Benefit-dependent households are already among the
          As benefit-dependent families tighten their belts
                                                                        lowest earners in our society. Their spending power
          on all areas of spending, housing costs keep
                                                                        continues to be challenged even more by rising housing
          growing                                                       costs, meaning less money to enjoy for non-essential
          Benefit-dependent households spending remained at a           spend such as experiences and holidays.
          low level throughout the seven years of our analysis. It      This will also have the cumulative effect - across large
          grew more slowly than any other type of household.            numbers of households over many years - of reducing
          There was, however, a consistent increase in the              liquidity in the economy as less money is spent on other
          proportion of incomes spent on housing.                       areas.

          Our projection is that these families will spend the lowest   With the employment rate at an all-time high in the
          proportion of their income on lifestyle and transport of      UK, it is less likely there will be the same movement
          all groups in 2019. On lifestyle, this will be 10%, and on    of low income benefit dependent household workers
          transport just 6%, compared to an average of 14% and          from unemployment to employment. Businesses and
          10% across other groups.                                      society will therefore need to carefully consider how
                                                                        they respond to this trend of higher housing costs
          Benefit-dependent families will likely see the lowest level   as a proportion of income among benefit-dependent
          of spending growth in 2019 for lifestyle (1.8% compared       households.
          to an average 3%), retail (1% compared to an average
          1.8%), and holiday spending (3.5% compared to an
                                                                        Benefit dependent families 2019 spending graph
          average 4.1%).

          In transport their spending is projected to decrease by       4.0%

          0.7%. Across other age groups, we conclude that the

          average level of spend will go up by 1.8% in the same         3.0%

y & Wages period.                                                       2.5%

          Based on current trends, growth in housing spend is
 3.6%     predicted to be 3.9% for this group in 2019 - the same as

mployment young vocational workers, and a higher rate of growth         1.0%

          than singles, young professionals, mid-affluence families

          and high-earning families.

                                                                                Retail   Lifestyle   Holiday                Education   Housing   Health


her Income Spending as a proportion of income is also set to be         -1.0%

          higher than any other group.

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                                                              Businesses and societies will succeed or
The shift towards experience spending over
                                                              fail on their ability to grasp detailed data
retail has grown across groups to become a
                                                              flows and the way they can create wider
mainstream trend that shows no sign of slowing
                                                              knock-on effects.
Millennials, having led this movement, are now taking
the experience-first expectation into their working lives
as they move away from traditional career models and          The wide picture of the UK economy is, perhaps
into self-employed and flexible working environments.         unsurprisingly, multi-faceted and complex. The groups
                                                              and shifts we’ve identified go some way towards
We’ve also found the Formidable 40s are to a large            improving understanding of the currents of information
extent the engine room of the UK economy. They are            flowing through our lives. But there is always more to be
earning, spending, and contributing more than everyone        done. In a world defined by data, the work of unpicking
else on every relevant metric in our Spending Power           and unravelling it never stops.
                                                              And it is this changing paradigm that the Spending
And we’ve also identified one area of the British economy     Power Index describes. Businesses and societies will
- Benefit-dependent families - where spend on housing         succeed or fail on their ability to grasp detailed data
costs is the highest of all as a proportion of income - and   flows and the way they can create wider knock-on
its rate of growth shows no sign of slowing down.             effects. Nowhere is this more important than in the
                                                              financial flows of income and spending patterns, the
                                                              lifeblood of the UK economy.

                                                                                                       Paper subtitle | Page 12
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Further information on the methodology
Experian’s proprietary UK Macro model includes
income forecasts by component of income (e.g.
wages and salaries) and expenditure forecasts by
detailed Classification of Individual Consumption by
Purpose, (COICOP). This is a standardised classification
system published by the UN Statistics Division that
includes categories such as Health, Transport, and
Communication spending, among others.

This model was used to drive forecasts of income by
component and detailed COICOP expenditure in GBP per
household, per week, split by gross income decile. The
income and expenditure data by gross income decile is
taken from the ONS Living Costs and Food Survey
(for both retired and non-retired households).

The income and expenditure forecasts by decile were
then converted to income and expenditure forecasts by
FSS type, using household gross income bands by FSS
type in the FSS segmentation.

Additional information on the FSS methodology can
be found online: https://www.experian.co.uk/marketing-

1. h
2. h
3. h
4. https://www2.deloitte.com/content/dam/Deloitte/
    survey-2016 exec-summary.pdf

                                                                             Page 13
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