Strategic marketing consultancy | Brand marketing consultancy | The Marketing Directors logo

The UK Productivity Conundrum; Eight Insights for UK plc

  • Productive worker bee on lavender

Productivity is an economic concept (Figure 1). It represents the ratio of economic output: input. Practically, productivity assesses the competitiveness of an economy, and the health or otherwise of constituent businesses. It also indicates a country’s ability to improve raise wages over costs as this depends largely on raising output per worker. Thus understanding UK productivity is key to determining how to improve the UK economy and businesses.

UK Productivity = Outputs/Inputs
UK Productivity = Outputs/Inputs

Since 2008, UK productivity failed to follow the previous 10 years plus trend line (Figure 2). Overall output fell by 6% yet employment by just 2%. As a result, productivity fell by 4%. Exactly why UK productivity failed to grow is hotly debated by economists (1). The decline is similar to other major OECD countries (with exceptions such as the USA and Ireland (2)).

UK Productivity Conundrum | Figure 2 : UK productivity 1994-2018 ONS

We, therefore, thought it helpful to have a view. So in this article, we investigate why? We also pin-point lessons for UK plc and businesses. In particular, we cover:

  • How to measure productivity?
  • The employed population
  • The role of the service sector
  • The role of the Internet
  • The rise of challenger brands
  • Management influences
  • Conclusions

How to measure productivity?

In general, labour productivity is the ratio between a measure of output volume (gross domestic product or gross value added) and a measure of input used (the total number of hours worked or total employment).

For our analysis, we use the following UK Office for National Statistics (ONS) definition (3).

Productivity = output per worker i.e. Gross Value Added  / Total Number of Hours Worked (by those employed).

Gross value added (GVA) is the same as gross domestic product (GDP) minus taxes on products plus subsidies on products. We use the ‘Chained’ definition to eliminate the effect of inflation.

We also use time series data with 2007 indexed as 100 to match Figure 2.

Thus, for productivity to improve, this means that output must rise ahead of hours worked. Or more must be produced in the same or fewer hours. Let’s investigate further.

Reasons behind UK productivity decline

Figure 3 shows first, that total hours worked failed to keep pace with the trend line between 2008-2014. The decline between 2008-2014 reflects the fall-out from the banking crisis. Between 2007 and 2009 some half a million lost their jobs when many firms down-sized, went out of business (and/or were taken over). Some notables in financial services include Northern Rock, Bradford and Bingley and Lehman Brothers.  However, total hours worked is now back on the long-term trend line mirroring population growth. Nevertheless, the number of hours worked has failed to ‘grow output’ or it has held up despite the fact there is less to do. Both options suggest some time is ‘wasted’ or ‘inefficient’.

Fig 3 : UK productivity (output/hour) 2000-2018. Depressed by low output and increasing hours worked. ONS

Second, total output (Chained GVA) grew strongly between 2000-2007. It also fell sharply at the height of the banking crisis, yet continues to under-perform the trend line. Thus this also appears a compelling reason for the productivity decline. Let’s investigate both of these factors further.  Starting with the supply-side.

The growth of single owner businesses and part-time employees depress output

Since 2008 the number of single owner businesses and part-time employees grew above the trend line (Figure 4).

UK Productivity Conundrum | Figure 4 : Growth of part-time employed and single owner businesses 2000-2018. ONS and Dept for Business, Industry and Skills

However, according to the Annual Business Survey, the ONS’s annual tracker, small firms produce less than large firms (Figure 5). Overall, therefore, it seems that a shift in the mix to less productive firms has depressed overall UK productivity. Further, as Figure 5 also shows, even the productivity of the largest firms fell during the heights of the financial crisis. This  suggests that even switching some workers to part-time contracts, failed to maintain productivity. Of course, both part-time and full-time workers still require the same training.

UK Productivity Conundrum | Figure 5 : GVA per worker 2006-2015. Larger firms produce more per worker than smaller firms. ONS, Annual Business Survey

Further, looking at the ‘W’ shape of Figure 5 suggests that firms of all sizes have ‘bounced-back’ from the worst of the recession. With output at between £43-52,000 per worker, figures match those a decade earlier. It therefore appears that both employers and workers appear to have swallowed a new pill to keep businesses fully functional, flexible and to benefit quickly from an economic recovery.

The service sector is a key growth driver (Figure 6)

The UK service sector currently accounts for 80% of output and hours worked (2018). This is an increase of 7% points in output and hours worked since 2000 (from 73%). Further, in the 7 years to 2007 the increase was 4% points, yet in the last 11 years, just +3% points. While the service sector continues to grow ahead of the rest of the economy, growth remains below the pre-2007 trend line. As Government has focused on ‘belt-tightening’ since 2008, and Brexit since 2015, it is unsurprising, that spending remains depressed. But what’s going on in the different sectors?

UK Productivity Conundrum | Fig 6 : Service sector output 2000-2018. ONS

Under-performing and over-performing service sectors

Closer inspection of the performance of individual service sectors reveals six laggards: wholesale/retail, finance/insurance, recreation/culture, hotels/catering, transport/storage, and the public sector (Figure 7).  All six continue to perform below the historic trend line.  Performance changes may be due to lower levels of expenditure and/or trading down to lower value, margin, or non-essential services. This seems reasonable given several sectors appear more ‘discretionary’. A decline in transport could also be explained by an increase in ‘stay-at-home’ entertainment.

UK Productivity Conundrum | Figure 7 : Under-performing service sectors 2000-2018. ONS

Two sectors are yet to show a marked change of trajectory post the financial collapse. First, the finance sector which grew very rapidly to 2007 (with historical evidence pointing to uneconomic over-lending as the reason). ). Yet the sector still trails the pack. This seems due to a combination of low interest rates, low consumer confidence, and the rise of challenger banks (offering better value, and perhaps an opportunity for revenge). Second, the public sector; while resilient post ‘crash’, public sector GVA declined from 26 to 22% of the service economy from 2000-2017. However, hours worked remained c. 28% throughout the period. Thus output per hour has fallen and remains subdued.

Over-performing service sectors

Conversely, some service sectors have over-performed: services businesses (including rental, building and employment services), real estate, IT (including media and telephony), and other services (includes scientific, technical, law, accounting, advertising and consulting professions)  (Figure 8). However, growth for all but two remains below the historic trend line. Growing most strongly, are IT (reflecting many new markets and growing customer penetration), and service businesses.  Some services businesses, such as employment, advertising, consulting, and media firms, were highly responsive to changes in the economic environment. They quickly laid off staff or reduced hours or salaries, and vice versa, to maintain competitiveness and profitability. Many are also highly reliant on people, particularly well-educated people, to deliver services. Also on personal relationships to drive demand, rather than mass marketing, and the Internet.

UK Productivity Conundrum | Figure 8 : Over-performing service sectors 2000-2018. ONS

The growth of online is the elephant in the room

Since 2007 the UK has experienced major sociological shifts, ‘belt-tightening’ societal pressure, and the rise of online channels. The financial crisis of 2008 also seems to coincide with a tipping point in the rise of the Internet. In 2000, just 27% of the UK population had Internet access, and fast speeds were non-existent. In 2007, 75% of the population had Internet access, and 50% received broadband at an average speed of 4.6 Mb/second. The first iPhone also launched in 2007. Yet today UK Internet penetration is over 90%, and average download speeds are 45-47 Mb/second (4). The first iPhone also launched in 2007 yet today 80% own a smartphone.

Aided also by the growing number of comparison sites, there is an increasing and high propensity for customers to compare and hunt lower prices (up to 30% less) online.

Thus online purchasing has grown significantly from just 3.4% of retail sales in 2007 to nearly 18% in mid 2018. Further looking at trends (Figure 9), overall retail sales since 2007 remain below the overall output trend line. And retail sales excluding online sales, even further below the trend line. The pattern of decline is almost a mirror image of the growth in Internet users. 

Figure 9 : Growth of internet users and online sales 2000-2018. ONS

The arrival of Black Friday

The convenience and financial benefits of shopping online enabled by increasing broadband and mobile penetration continue to drive online sales growth at the expense of ‘bricks and mortar’ retailers. Black Friday appeared in the UK in 2009 championed by etailers such as Amazon, eBay, and others. It was also spurred by Asda in 2013. However in 2015 Asda de-clined to participate, announcing that their customers preferred year-round deals rather than a single day of discounting. Reading between the lines, this suggests the event had little effect on Asda’s bottom line. Perhaps merely serving to bring forward demand. Conversely, etailers have experienced significant sales and growth.

The rise of online challenger brands

The UK branch of Amazon EU alone amassed £21 billion sales in 2017, +80% over 3 years (and equivalent to £7.5m per employee). However, as this Amazon business is based in Luxembourg these sums are largely removed from the UK’s accounts.

While the wholesale/retail sector only accounts for a 10-11% of total output, other sectors such as real estate, hotels/catering, recreation, transport, and finance /insurance markets, also have burgeoning online sectors. And the last decade or so has seen online challenger brands enter and grow share in other markets too. Examples include Rightmove in real estate, Booking.com in travel/hotels, a myriad of flight search engines, Confused.com and ComparetheMarket.com in finance and insurance, and uswitch.com in energy.

The growth of online therefore appears to coincide with the removal of a significant chunk of income from the UK economy.

Significant growth in online advertising

Figures were first recorded for digital advertising expenditure in 2005. In 2005 spending was just under £600m (some 5% total advertising expenditure). In 2007 digital advertising spend was 9% of the total, and by 2017, 28% of the total (£5.7bn). This is a growth index of 474 vs. 2007 (Figure 10).

Figure 10: Growth of online advertising and online sales 2000-2018 ONS, Advertising Association and Internet Live

While online advertising potentially influences all purchases, growth better correlates with online sales rather than total output (Figure 10). While online advertising potentially drives income, it is also a cost, and only adds to profits if extra income generated exceeds extra costs. It remains to be seen whether this level of online advertising is sustainable (6-8% income) and grows margins.

What we do know however, is that a very great proportion of online advertising income is also due to US owned Google and Facebook – both based in Ireland. Google Ireland’s turnover is £27.5bn (£9.2m/employee) and Facebook Ireland’s turnover is £16bn (£4m/employee). Again this suggests a significant chunk of UK advertising output has shifted offshore.

Structured management practices enhance productivity

Now let’s return to the role of internal business influences on productivity (Figure 11). In 2016, the ONS surveyed management practices among 25,000 firms. The so-called ‘management practice’ score is an aggregate of several measures including practices relating to continuous improvement and employment management – such as those relating to promotions, performance reviews, training and managing under-performance. In the questions, a score of 1 is assigned to the most structured management practice and 0 the least.  The mean score across all organisations was 0.49. Their analysis found a statistically significant correlation between management practices and labour productivity, with an increase in management score of 0.1 associated with a 9.6% increase in productivity.

Figure 11 - Management practice score by size of organisation. ONS

The analysis also shows a statistically significant relationship between management practices, the size of a firm, and productivity.  Further analysis also reveals that family firms have lower management practice scores and productivity than non-family or foreign-owned firms. Management scores are also higher for the real estate, service business, and other services (scientific and technical) businesses. A higher incidence of degree-level staff is also associated with a higher management practice score and greater productivity.

Does time spent online at work affect productivity? 

Finally, we explore the effect of hours spent online at work to see if this has any bearing on productivity (Figure 12). Since 2007 the number of hours spent online at work (or in education) doubled from 3.3 hours (10% total in 2007) to 6.6 hours (20% total in 2017) (6).

Figure 12: Hours spent online at work or place of education

While we cannot precisely quantify productivity in those hours, some research raises questions. Asked whether ‘I feel more productive without the Internet’, 10% of adults 16+, and 15% of those aged 18-34 answered ‘yes’ (6). Recent announcements that Wetherspoons, and Lush Cosmetics, are closing their social media accounts, also confirms (at least for them) that the marketing time-costs fail to outweigh the benefits. And if marketers are failing to realise benefits, it raises the question are you?

Marketing Inspiration

  1. It appears that there are many supply and demand side-factors that depress UK productivity. Including competition from other nations.
  2. While the financial crisis spurred many new businesses, the smallest are least productive, and have most to learn. They should seek help from the UK’s world-leading academic, creative, and marketing consulting community.
  3. The financial crisis of 2008 also depressed customer confidence and purchasing. However, marketing deals with changing attitudes and perceptions. And basic marketing communication principles suggest that businesses and customers will buy and invest to secure benefits, rather than to avoid disbenefits. To drive demand, all should therefore promote positive messages. The national campaign starts here.
  4. Further technological and societal change is inevitable. And with online sales accounting for c.20% total, expect further growth. Marketing’s answer to the UK productivity crisis is to invest more in understanding the social and behavioural causes and effects, and inspiring products and services that deliver benefits.
  5. Off-line players face threats from low price online players and disintermediation. So choose to join and beat them. Or lose out. Winning requires improved customer value propositions or world-efficient supply and production capabilities.
  6. Digital promotion is here to stay. Though online advertisers should carefully measure returns. And remember that the marketing mix also includes off-line media with very high reach and impact.
  7. Declining public sector productivity is a threat to the whole economy, as income comes from private sources. The challenge is to deliver more for less, build world-class organisations and reduce income loss from UK shores.
  8. The openness of the UK economy, high Internet and smartphone penetration, and fast broadband, fuels customer and business agility, and innovation. However, the Internet also brings distractions that appear to dilute UK productivity. Addressing this starts with awareness of the issue.

What do you think?

References

(1) Patterson, Peter, Deputy Chief Economist, Office for National Statistics, The Productivity Conundrum, Explanations and Preliminary Analysis, 2012

(2) Organisation for Economic Development (OECD)

(3) Camus, Dawn, Editor, The ONS Productivity Handbook – A Statistical Overview and Guide, 2007

(4) UK Fixed Line Broadband Performance (Residential), OFCOM, November 2017

(5) Management and Expectations Survey, Office of National Statistics and Economic Statistics Centre of Excellence (ESCoE), 2016

(6) Communications Market Report, OFCOM, August 2018

Thanks to the UK productivity team at the Office of National Statistics for answering our questions and helping with our analysis. Also to fellow marketing consultants at The Marketing Directors, Chris West, and Tim Arnold. To anyone wishing to build on this analysis, please do. We’re also happy to share our datasets and insights to help you.

Brexit Planning; Time for UK business to embrace the world

Brexit - UK business and marketers should embrace the world l World of flags

On Dec 31st 2020 the UK left the EU single market. So what does this mean for UK businesses and marketers? As everyone digests the facts, and plans are enacted, new issues and opportunities become more evident. So it is never too late to finesse your Brexit plans.

Rather than think doom, gloom and despondency, think positive, and as global citizens, embrace the world

The trade barriers erected around the EU protect EU businesses from global competitive pressures. As a result they cause ‘flabby’ rather than ‘fit’ competitors. The UK has a proud history as a free trading nation and being ‘open for business’. Thus UK business should be materially ‘fit’ to compete in unfettered markets. Also to attract inward investment.

The world is a big market

According to the IMF (1) the world economy was worth $73.2 billion with the EU accounting for $16.2bn (22%) (Figure 1) in 2015. Thus the rest of the world accounts for the larger proportion (78%), with the USA, China and Japan, being the largest markets.

Global economy 2015
The world economy by country (2015)

Many global opportunities

Moreover, emerging markets are forecast to grow faster than the developed markets, and China and India will both reach the top 3 by 2030 (Figure 2). There are many opportunities to grasp.

Top 20 economies 2015 - 2050 ranked by GDP in dollars
The top 20 largest economies in the world 2014-2050

As marketers we know that the most successful businesses are those that understand and meet the needs of their customers. Thus investing in research and marketing to better understand and meet future customers’ needs, and build relationships and value makes sense.

Marketing Inspiration

1. To best manage the risks, and realise opportunities, you should continually update your business and marketing plans. Also make clear that you that you value your customer relationships, and take steps to strengthen those relationships.
2. Keep searching for win-win opportunities to sell, invest and buy. Also acquire knowledge to build competitive advantage. Use research to uncover insights and and realise short and long term opportunities.
3. Have no fear. The fittest or most able will be the most successful. So stay true to good business and marketing principles; understand customer needs, and demonstrate and deliver value in meeting needs.
4. For any business that considers themselves unfit, finesse your Brexit plans to maximise the value of your offer and embrace the world.

References

  1. International Monetary Fund
  2. PricewaterhouseCoopers

Promotions ; The Effect of ‘Labelling’ on Customer Behaviour

Qualitative vs. quantitative research | Food tasting research

How behavioural economics helps marketers

The labelling effect, recently discovered by behavioural economists, gives marketers another weapon in their arsenal of influencing techniques. Even small labelled promotions (vouchers to spend on certain items) shift spending patterns disproportionately. Tesco, Sainsbury’s and even the Government have used the labelling effect to alter behaviour. This short piece introduces the labelling effect and also explains how marketers can use this technique to influence customers’ choice of products.

Small promotions do not force customers to change their spending patterns because they can easily rearrange their budget. In reality, however, small promotions do affect which items are purchased. Thus marketers can target small promotions at highly profitable items to encourage customers to spend more on those items.

A promotion is ‘non-distortionary’ if the customer would have spent more than the value of the promotion on the targeted product anyway. The labelling effect occurs when consumers react to these promotions by spending more on the targeted item. For example:

Example 1: Retail

A recent study gave customers at a restaurant an €8 voucher (1). Vouchers could be spent on beverages (the ‘labelled’ voucher) or food or beverages (the ‘unlabelled’ voucher). As customers usually spend at least €8 on beverages the gift is non-distortionary: customers could rearrange their money to spend the same amount of money. However, customers who received the labelled voucher actually spent on average €3.90 more on beverages than those with the unlabelled voucher.

Interestingly, the most common behaviour was to spend the voucher on the targeted good. Additionally, those with lower non-verbal cognitive ability were more likely to respond to the label. Non-verbal cognitive ability involves problem solving skills and mathematical ability as opposed to language skills.

Example 2: FMCG

Supermarkets are also starting to use labelled vouchers to nudge customers towards more profitable goods.

Tesco promotion

Here Tesco is offering a 20p discount on top range lettuces. Clearly, the label means that customers are more likely to buy one more top range lettuce than if the voucher could be used on any item.

Sainsbury's promotion

Here Sainsbury’s is using a small promotion to nudge consumers towards bakery items. The labelling effect means that this 40p discount will disproportionately increase spending on bakery items.

Example 3: Government payments

The Government also uses the labelling effect on benefits such as the ‘Winter Fuel Payment’ (WFP). Currently, pensioners spend on average 41% of the WFP on fuel. However, if named ‘The Annual Allowance’ they would only spend 3% of it on fuel (2).

What causes the labelling effect?

There are three potential causes of the labelling effect: narrow bracketing, mental accounting and reciprocity.

Narrow bracketing  

This is the process whereby people split one decision into separate parts and then consider each part in turn (3). For example, people may decide to spend their budget on food, beverages or both.  If their usual budget decision were totally unaffected by say an 8 Euro voucher then, then all would be spent on the targeted good.

There are four possible causes of narrow bracketing. Firstly, customer’s cognitive limitations. Secondly, cognitive inertia (it simplifies decisions). Thirdly, by applying previous value judgements or ‘rules of thumb’ to spending behaviour, such as ‘always spending at least £10 on a bottle of wine’. This could cause customers to see the wine cost as separate to the rest of the cost of the meal. Fourthly, through deliberate or conscious action to control or check expenditure, perhaps as a New Year health or budget resolution.

Mental accounting

This is a form of narrow bracketing whereby people divide their expenditure, wealth and income into different ‘mental accounts’ (4). These mental accounts represent narrow brackets. For example, a restaurant patron may have two separate dining budgets in his or her mind; a food budget and also a beverage budget. The unlabelled voucher could therefore be split between either account, while the labelled voucher may only be added to the beverage budget. Once allocated to an account, money is not easily shifted as the label given to the gift affects spending.

Furthermore, the tighter the customer’s budget, the more strictly mental accounts are enforced.  So the labelling effect has greater impact on the less wealthy.

Feelings of reciprocity

These may cause customers to respond in a way they think is helpful to the gift-giver. Customers may see a promotion as a gift and reciprocate by spending more of the gift on the targeted good. Reciprocity does not cause the labelling effect on vouchers, but it may do for Government payments.

Is the labelling effect transparent?

In the context of retail vouchers, most people are aware of the labelling effect per se but fewer are aware of its real impact (5). Awareness of the labelling effect is driven by non-verbal cognitive ability and age. The use of labels is less obvious to younger people with lower cognitive ability. Conversely, those more likely to respond are less likely to know about it.

Marketing Inspiration

1. Labels change behaviour so target promotions such as vouchers to increase spend on more profitable goods. Do not assume your customers will rearrange their money, even with small promotions. So if your customer spends £10 on books and £10 on (more profitable) DVDs, a £5 gift can significantly change  spending balance. Evidence suggests labelling the voucher for DVDs would cause customers to spend £2.50 more on DVDs than they would with an unlabelled voucher.

2. Nudge your customers into narrow bracketing by creating new product divisions in categories and markets. If some DVDs are more profitable than others, then divide them into groups by age or genre.

3. Use the labelling effect to make the most of loyalty scheme promotions. Perhaps by making reward points worth more on certain products, or by allocating reward points to different ‘accounts’ to spend on different products.

4. Use behavioural economics to uncover new insights and optimise your promotions. Small promotions and labelling or small changes in copy can change spending patterns. Schedule research, such as quali-quant tests or hall tests to understand the causes and effects.

References

(1) Abeler, J. & F. Marklein (2013), ‘Fungibility, Labels, and Consumption’, Working Paper. First published May 2008 as IZA Discussion Paper No. 3500.
(2) Beatty, T., Blow, L., Crossley, T. & C. O’Dea (2011), ‘Cash by any other name? Evidence on labelling from the UK Winter Fuel Payment’, Institute for Fiscal Studies Discussion Paper.
(3) Read, D., Loewenstein, G. & M. Rabin, (1999) ‘Choice Bracketing’, Journal of Risk and Uncertainty, 19(1–3), p.171–97.
(4) Thaler, R. H. (1999), ‘Mental accounting matters’, Journal of Behavioral Decision Making, 12, p.183-206.
(5) Hogg, T. (2013) ‘Fungibility: Are People Aware of Non-Fungibility?’, MSc Dissertation at The University of Nottingham. Available on request.

Restoring Business Growth ; 3 Step Business Turn -around

Restoring business growth
Restoring business growth or turn-around

Restoring business growth

Often new hires, either a CEO, or CMO, coincide with a challenge of restoring business growth. But how? Here are three steps for a fast and effective business turn-around.

1. Understand the effect on your business

First, understand the effect on your business or portfolio as a whole. How significant or material is the effect in relation to the business as a whole? If it is small then delegate responsibility to solve the problem, if large, then there is a case for you to invest more of your own time.

2. Diagnose the problem

Then diagnose the cause as quickly as possible. Ask questions and form your own opinion of the cause and the ability of your team to solve the problem. The scale, complexity, political sensitivities of the problem will affect the ability of your own team to develop a solution.

Then diagnose the cause as quickly as possible. Ask questions and form your own opinion of the cause and the ability of your team to solve the problem.

  • First, is the problem a one-off, recurring or ongoing?
  • Second, is the problem caused by an internal operational issue or external market forces?
  • Third, is the problem product, promotion or strategy related?
  • Fourth, is it people or process related?
  • Finally, what plans do we have to deal with the issue?

To check that the problem is understood, and to corroborate this is the case, ask for a paper discussing the issue as well as recommending options to deal with it.

The scale, complexity, political sensitivities of the problem will affect the ability of your own team to develop a solution.  If your own team struggle to be objective, seek help from a third party. Using experienced consultants and conducting original customer research helps you remain objective and apolitical.

3. Drive change

When you fully understand the issues and then create a marketing strategy and plan to drive change.  However, the nature of your approach should depend on the effect of the business problem, and the ability of your team to solve the problem. If the problem is less significant, prefer a light touch approach. If the problem is significant or catostrophic, prefer a more directive and hands-on approach.  First, check that the problem is understood. To check ask for a paper discussing the issue as well as recommending options to deal with it. Then drive action. If the problem reaches across departments, set-up a task force to deal with it and ensure clear access to relevant senior management. If the problem is beyond the ability or experience of your current managers, then strengthen the team or replace the key people.