UK retailers face a £5.6bn surge in costs this financial year – equivalent to 195,000 full-time retail jobs – forcing the industry to ramp up prices, cut costs, and take a profit hit, according to new analysis from research consultancy Retail Economics and frontline operations specialist Yoobic.
From today, retailers will operate in a significantly higher cost environment, driven by changes in retail business rates relief, higher minimum wages, and increases in employer National Insurance contributions.
With costs set to rise, the report notes that 89% of retailers have calculated the potential Budget burden, implementing strategies to mitigate against the impact. Retailers are expected to use a range of different measures, including pricing adjustments, operational efficiencies, and cost absorption, to maintain competitiveness.
The £5bn additional cost in 2025/26 is forecast to be mitigated by retailers as follows:
- Cost optimisation (£2.08bn of cost savings) – investing in operational efficiency, automation, and restructuring to mitigate rising costs without eroding margins.
- Absorbing costs (£1.76bn hit to pre-tax profits) – accepting a reduction in profits rather than passing costs onto customers.
- Price increases (£1.72bn of costs being passed onto consumers through higher prices) – adjusting pricing strategies to offset rising expenses.
Retailers typically operate on thin pre-tax profit margins at 5.3% on average. Absorbing costs through a reduction in profit of £1.76bn in 2025/26 represents a 6.7% drop in industry profits year-on-year. The study suggests that absorbing costs remains a necessary tactic for many. Large retailers are more likely to absorb costs, leveraging their financial strength, whereas small retailers prioritise cost optimisation, adopting agile operational improvements instead.
However, retailers remain cautious about increasing their prices due to consumer price sensitivity. Online retailers are particularly hesitant due to high price transparency, while store-based retailers (especially smaller ones) are more likely to adjust pricing with localised strategies.
Retailers are set to save £2.08bn in 2025/26 by prioritising cost optimisation, focusing on efficiency and productivity to offset rising costs without sacrificing service levels or cutting back on store hours, staffing, or investment.
While no single solution dominates, the report suggests that supply chain optimisation is the leading tactic, pursued by 39% of retailers, highlighting the urgency to build leaner, more resilient operations. Financial engineering – including working capital management – is also high on the agenda (38%), helping to preserve liquidity in a tighter fiscal environment. Digital transformation and automation is being pursued by a quarter of retailers, including almost half of food retailers, accelerating digital investment to redefine processes, staff engagement and shopper interactions.
The report states that store portfolio optimisation will be a defining trend in 2025/26, with more than a fifth (22%) of retailers planning action. Store optimisation is skewed towards non-food retailers, more exposed to discretionary spending volatility. Additionally, smaller and medium-sized businesses are under greater pressure to optimise store networks compared to larger retailers, which benefit from stronger balance sheets and favourable leases.
However, against a backdrop of cross-channel shopping behaviours, retailers are not simply exiting physical retail – instead, they are reconfiguring store strategies to adapt.
Key approaches include:
- Relocating stores (16% of retailers) – Aligning store locations with shifting customer demand and footfall patterns.
- Reducing store size (14%) – Adjusting store formats to improve efficiency and productivity.
- Merging stores (14%) – Combining multiple stores into a single, larger location to optimise operations (i.e. reducing store count while maintaining overall selling space).
- Revamping store layouts (13%) – Redesigning stores to align with evolving customer expectations, often integrating digital and experiential elements.
- Closing stores (7%) – Exiting underperforming locations where cost pressures outweigh profitability potential, with non-food retailers more affected than food retailers.
Local high streets and shopping malls are expected to be most at risk of closures, consolidation and relocations, with 14% of retailers impacted, while flagships are more defensible – being strategically important for brand awareness, customer experience, and omnichannel fulfilment.
“Retailers are staring down the barrel of a £5.6bn wave of additional costs that will squeeze margins and threaten jobs across the industry,” said Richard Lim, Chief Executive Officer at Retail Economics.
“With operating costs rising sharply, many retailers have little choice but to absorb some of the financial pain while cautiously passing costs onto consumers already facing their own pressures. The scale of this challenge risks stalling investment, accelerating store closures, and reshaping the retail landscape in the year ahead.”
Fabrice Haiat, Chief Executive Officer of Yoobic, added: “As cost pressures rise, retailers must rethink their approach to frontline operations, which are too often seen as a cost centre rather than a competitive advantage and a strategic driver of profitability. To mitigate the impact of cost increases, efficiency and productivity are core mitigation tactics. Retailers need to accelerate digital transformation and automation of their processes in stores to avoid hefty price increases for consumers.”
