Have you noticed your company isn’t growing? Rising asset prices and stagnant wages are causing UK companies’ growth to stall by restricting their customer purchase power.
Our latest article explores the growing wealth Inequality gap in the UK, the impact on businesses and provides our views on how business can adjust their strategies for company growth and adapt to the economic changes facing the UK.
Background
In the current UK economic landscape, companies face a significant challenge in maintaining their customer base amidst rising wealth inequality and lowering disposable income among the lower and middle classes customers. This phenomenon is largely driven by the fact that asset prices have been rising more than wages, leaving the majority of people asset-poor in a society where wealth is increasingly concentrated.
Over the past three years, asset prices in the UK, particularly house prices, have significantly outpaced wage growth. From 2021 to 2024, house prices increased by approximately 11.8% annually, with some regions experiencing even higher growth rates. (GOV.UK). In contrast, wage growth has not kept pace. Average weekly earnings, including bonuses, increased by around 5.9% to 6.2% annually during the same period (ONS).
This disparity indicates that asset prices have been increasing nearly twice as fast as wages. You can see this visually below in the graph. The graph represents the approximate asset price vs wage growth across 2021 – 2024.
You can appreciate there is a significant gap between asset price growth and wage increases, which worsens wealth inequality, making it increasingly difficult for lower and middle-class individuals to keep up with rising living costs and diminishing their disposable income.
Analysing Strategies for Company Growth
The Squeeze on Disposable Income
Over the past decade, the UK has seen substantial changes. These changes have impactful effects for both businesses and individuals. Stagnating turnovers and squeezed profits are not solely due to internal inefficiencies or poor marketing strategies. For many limited companies targeting lower and middle-class customers, the issue could lie in the falling real wages and subsequent decline in purchasing power.
It is my view that, despite nominal wages appearing stagnant, the rising costs of assets and essentials like food, energy, and housing have significantly reduced the net income and actual disposable income available to business customers.
Businesses face an additional challenge when trying to address this issue: they cannot simply increase staff wages to help employees catch up with asset price increases. Implementing widespread wage hikes would require a UK-wide commitment, which is unattainable due to cash flow constraints. Most businesses do not have the financial capacity to sustain higher wages long enough.
Such an approach would likely lead to increased operating costs without a proportional increase in revenue, potentially resulting in financial instability or even business closures. Therefore, while increasing wages could theoretically help alleviate some pressure on disposable income, it is not a viable solution without broader economic reforms and support. We need stable government and a strong economic policy to try increase consumer confidence. Low consumer confidence will simply result in saving habits with any excess disposable income rather than increased purchasing. Leaving businesses in no better a position.
Price Elasticity of Demand Impacts
As a company owner, you need to understand the concept of price elasticity of demand. It measures the responsiveness of the quantity demanded, to the change in price.
For products and services with high elasticity, a small price increase can lead to a significant drop in demand. This is particularly relevant for businesses serving the lower and middle classes, whose purchasing decisions are highly sensitive to price changes due to their limited disposable income.
Wealthier consumers are driven by perceived value and exclusivity. High-quality and limited-edition products that offer a sense of prestige. These are particularly appealing to this demographic, suggesting a lucrative market for businesses willing to cater to these preferences. There is a result of these markets being more price inelastic, meaning small price increases do not have a drastic impact on demand of the product/service.
Businesses with stable demand to price changes, tend to be more successful over long term trading as they can continue to trade through difficult economic conditions.
The Impact of Wealth Inequality for Companies
Wealth inequality in the UK is not just about income disparities but also about asset ownership. In a more equal society, wealth is distributed more evenly among the middle class, leading to higher consumer spending and more inelastic demand for products and services.
However, in a wealth-unequal society, wealth is concentrated among a few, reducing overall consumer spending as the wealthy tend to save more and utilise asset investment returns for their income. This very decision is why asset prices are on the rise and becoming unattainable for the lower and middle class.
As the prices increase the demand falls, but it only falls for the lower and middle class. For the Upper class, the price increases do not affect the demand as significantly. Meaning they can continue to purchase and add to their portfolio. This all results in a smaller customer base and lower revenue for businesses catering to the average consumer.
Recommendations
Company Strategic Shifts
When I reviewed these trends, it highlighted the challenges companies face in maintaining a customer base that is increasingly sensitive to price changes. This data supports my view that companies need to consider shifting their focus to wealthier customers to achieve more stable business.
Given this landscape, companies should consider a shift to target upper-class and diversify their markets. Wealthier customers have higher disposable income, making them a more stable and lucrative market. Products and services aimed at this demographic, such as luxury goods, high-end services, bespoke products and assets, such as property, are more resilient to economic downturns affecting the broader population.
Take, for example, the success of luxury brands like Burberry and Rolls-Royce. By targeting high-net-worth individuals, these companies have maintained strong revenue streams even during economic downturns.
Entering the luxury market requires significant investment in branding, quality, and customer experience. Companies must carefully assess their capabilities and market position before making this shift. Taking a balanced approach could prove to be the most cost effective and appropriate steps in the initial stages.
Closing Thoughts
I believe that the Increasing wealth inequality is having, and will continue to have, a detrimental effect for companies. It reduces consumer spending, stalls business growth, and lowers wages. By shifting focus to upper-class markets, companies can achieve more price inelasticity and stable revenue streams. Strategizing how to balance the move to these markets will be critical for a successful transition
I believe that advocating for systemic changes to promote wealth distribution remains essential for long-term economic stability and growth. Practically being able to achieve this is unlikely. Our political landscape in the UK is one of egos and self-interest. As such, companies have to look after themselves and can’t rely on our countries leaders making changes to help.
Take a step back. Review your business, its goals and capabilities. Then take everything I’ve written into account and plan how your company needs to shift to protect itself. If you want to continue learning how you can grow your business, check out one of our other articles, ‘Unlocking Growth Potential’, or reach out to one of our accountants for 1-1 tailored support.
Author: MJ Kane
