The importance of imports in consumer spending
The UK is currently set to withdraw from the European Union by 31st October 2019. In order to better understand the potential impacts this may have upon the consumer landscape, we looked at the goods and services that are most important to consumer spending and the degree to which imports contribute towards their overall supply. We then combined this data to evaluate which of these goods and services could be impacted the most and least by potential price changes arising from changes to imports. The aim of this research was to:
1. Explore how import dependence varies across different types of goods and services
2. Understand how important different goods and services are by surveying consumers to see whether they would adjust their shopping behaviour if prices were to rise sharply
3. Combine the import dependence and importance of different goods and services through statistical analysis, to better understand which items are both important and import intensive.
This research aims to further understanding of the fundamental relationship between the spending importance and import dependence across a wide range of goods and services. It is a static analysis, so does not capture how certain items may be affected by changes in other factors various means in the future. For example, this could include changes to the UK’s trading relationship with other countries, changes in the availability of foreign workers, movements in the value of the pound or how sensitive different items are to price rises in the first place.
In addition, it also does not consider the importance of standards that imports are produced to in this context - although previous Brexit Which? research shows that these are critically important to consumers and will in turn affect consumer attitudes and acceptability.
When UK consumers purchase goods and services, some part of that good or service may have been imported from abroad. For example, some items - such as fruit and clothing - tend to be directly imported from abroad, so that some proportion of the final price will be used to pay an overseas supplier or provider. Other items, like gas, are purchased domestically from British energy companies who, in turn, may buy gas from wholesale markets that has to be imported from other countries. These items are therefore ‘indirectly’ imported when British consumers pay for them.
The extent to which the UK imports certain goods is called the import penetration rate. This calculates the proportion of £1 of consumption on a certain good or service that is ultimately used to pay suppliers and companies abroad. The average import penetration rate is around 25% - which means around 25p in every £1 spent in the UK goes to a non-UK company in that supply chain1.
1The import penetration rate includes all expenditure abroad. At the time of writing, data on import penetration rates split by trading partner (e.g. covering EU and Non EU trade separately) are not available. A separate data source calculates trade volumes by trading partner. This data estimates that in 2018, around 55% of the UK’s imports went to the EU. Imports of certain items - such as cars and meat - are mostly sourced from the EU, while clothing imports mainly come from outside the EU.
The National Accounts are classified into over 80 goods and services and there is a lot of variation in the import penetration rates across these items. For instance, rents, education, alcohol and tobacco have low import penetration rates (below 10%), which means there isn’t much of an imported component for these items, hence less reliance from supply beyond the UK. In contrast, cars, medication, footwear and fruit all have higher import penetration (above 40%). This means that, for these items, the UK heavily depends on suppliers abroad.
Combining imports and importance
Using the new questions in the Which? Consumer Insight Tracker in combination with data on import penetration ratesa, the chart belowb groups all goods and services bought in the UK into four distinct groups.
These groups have been created after statistical clustering via a K-means algorithm. This technique segments the data based on their relative importance to consumers (using Which? survey data) and their import penetration rates (ONS data).
a The National Accounts divide spending expenditure into 85 categories in a system known as the Classification of Individual Consumption According to Purpose (COICOP). In the March 2019 Which? Consumer Insight Tracker, respondents were asked questions on 45 different goods and services. While some of these had an exact mapping into a COICOP category (e.g. vegetables), others were mapped to more than one COICOP category (e.g. responses to Energy were mapped to both gas and electricity). The remaining COICOP categories were manually assigned an essential score (including rents and education).
b The chart above simplifies the 85 COICOP categories and provides examples where possible (e.g. 'Information processing equipment' has been converted to 'Computer devices and software (e.g. tablets)')
One interesting result from the interactive bubble chart is how certain goods have very similar import penetration rates but different levels of importance to consumers (and vice versa). For instance, pet food, gloves, confectionery and garden plants all have fairly similar import penetration rates. But our analysis suggests pet food is, on balance, is more important to consumers than the other items. Therefore if there was to be a sharp rise in the price of all these items, consumers who have pets may be less inclined to sacrifice consumption on pet food in comparison to the other items.
Likewise, respondents viewed consumption of footwear and newspapers as similar in importance. But the import penetration rate of footwear is much higher (at 50%) compared with 20% for newspapers. This means products which appear as important as each other can have very different import penetration rates.
A short summary of each of the four groups is as followed:
Category 4: High importance and high import reliance items. This makes up around £19 per £100 of consumer spending and includes staple food items, fuel and pharmaceutical products. These are the goods which may be most at risk from sharp price rises if consumers find it difficult to import them, for example due to supply shortages. Conversely, they are also the goods which may benefit consumers the most if prices were to fall as a result of lower trade barriers in the future.
Category 3: Medium/low importance and high import reliance items. This makes up around £17 per £100 of consumer spending. The most significant items here are clothing, cars (new and existing), electrical appliances (e.g. washing machines and kettles) and mineral water. These items have a high import component. But respondents in the Which? Tracker appear willing to substitute to cheaper items if prices were to rise sharply - or reduce either the amount or frequency with which they purchase the item
Category 2: High importance and medium/low import reliance items. This is the largest category by consumer expenditure (£39 per £100 of spending) and includes spending on housing costs, as well as other services such as insurance and education. While these might be deemed as highly essential by respondents, these items are mainly provided by UK-based companies and individuals, and therefore the import reliance is relatively low.
Category 1: Low importance and medium/low import reliance items. The remaining £25 of consumer expenditure is made up by goods which are relatively less important to respondents and have fairly low import penetration rates. These include hotels, recreational items and furniture. Therefore, under a hypothetical scenario of sharp price rises in more essential goods and services, consumers may be inclined to reduce their spending on these items first in order to maintain their spending habits on items with a higher essential score.
We have identified four groups of goods and services which British consumers purchase by combining granular data on import penetration and ratings of importance of those goods and services to consumers via our online Consumer Insight Tracker survey.
Around 40% of consumer spending goes on goods and services with relatively high import penetration rates (in Categories 3 and 4). Within this, around half (or 20% of overall spending) are in goods and services which the average British consumer may find difficult to adjust their spending habits for, were prices to rise sharply in future. These mainly comprise items which are perhaps unsurprising, such as staple foods, fuel and medical products, but also includes others that may be more surprising, such as pet food.
At the other end of the scale, around 25% of consumer spending goes on goods and services (in Category 1) which are mainly produced in the UK and are considered discretionary by most consumers. In the scenario of sharp price rises, some consumers may first look to switch their spending away from these items.
The Which? Consumer Insight Tracker is a flagship consumer research survey providing a uniquely detailed picture of today’s consumers. The survey has been running since June 2012 and is updated every other month. Selected data from the tracker is available to view here.
This article features questions asked in the March 2019 survey wave, which was run by Populus on behalf of Which?. This wave surveyed 2130 UK adults online between 20th and 21st March 2019. Data were weighted to be demographically representative of the UK population.
Alongside our regular tracker, and as part of our Brexit consumer research programme, Populus have run a Brexit tracker survey on behalf of Which? since September 2017. This consists of a quarterly quantitative tracker survey and a series of online communities. Selected data from the tracker is available to view here.