The latest assessment by KPMG/RetailNext Retail Think Tank (RTT) suggests that falling consumer demand combined with a barrage of rising costs is set to create a challenging six months ahead for the retail sector.
With early indications of a disappointing Christmas trading period for some retailers, particularly in non-food categories, and food retailers resorting to increasing the level of promotions in order to drive sales this year, the group of industry experts who regularly analyse the health of the sector, stated that there will be very little respite as firms enter 2024.
The group’s Retail Health Index (RHI), which assesses the state of health of the UK retail sector by considering the three key drivers of demand, margin, and cost, concluded that beleaguered consumers will hit the pause button on spending even further in the opening months of 2024. Despite having more money in their pockets than they did in the first quarter of 2023 due to reductions in National Insurance Contributions, wage growth outstripping inflation and lower fuel bills, which has helped to boost household income slightly year on year, consumer sentiment is likely to remain low as the mood music around an ailing economy impacts their willingness to spend.
The RHI has recorded a deterioration of retail health every quarter since Spring 2022, and this is predicted to continue in the first half of 2024, hitting 66 points by the close of Q1 24, a figure last seen in the height of the pandemic in 2020 when the UK was in lockdown. While the opening months of 2024 are likely to see a continued downturn in consumer demand, especially in non-food categories, the RTT believes this is just the calm before the storm as Q2 24 will see the sector hit by rising costs, including a hike in the minimum wage and a 6.7% business rate increase for most retailers.
While demand is likely to pick up in Spring (Q2 24) as consumer confidence builds, rising costs will hit retailers, particularly those whose finances are not stabilised, signalling potentially higher insolvency rates for small retailers and a boost in M&A activity – particularly in fashion and pure online retail, where there will be pressure on consolidation.
Paul Martin, UK Head of Retail at KPMG, commented: “Despite Black Friday sales going deeper and lasting longer than last year, indicators so far are that Christmas trading this year has been one of the worst since the pandemic hit, and although there is still all to play for in the final weeks of December, it is looking as if it’s too late turn fortunes around. Whilst food retailing sales growth has been weaker than seen over Christmas last year, sales of non-essential goods have been deteriorating rapidly and will continue to do so as consumers keep an even tighter grip on the household purse strings.
“It has taken a long time for the economic challenges to feed through to consumer resilience, but it looks as if it’s happening now, and is set to stay with us, at least until spring. The UK retail sector will likely continue to see significant downward pressures on demand and margin for the early part of 2024, but this could turn a corner by April, just as hefty increases in minimum wage and business rates hit the bottom line. Retailers will be holding their breath for some good news in the Chancellor’s Budget in March”.
He concluded: “Retailers have been remarkably resilient over the last few years and are now well versed in being agile to cope with economic shocks and changing consumer demands. Pressures on consumers from high inflation may be easing, but the economy faces headwinds from the lagged impact of monetary policy tightening and rigid fiscal policy settings. For the next few months, we expect the retail sector to continue to tread water as it moves from dealing with one shock to another.”
Commenting on the grocery sector, Mike Watkins, Head of Retailer and Business Insight at NIQ UK, said: “After two years of falling volumes in food retailing, there is likely to be a return to volume growth in 2024. For many supermarkets, the quest to gain shopper loyalty – frequency of visits and total shopper spend – will intensify.
“The extension of loyalty schemes has helped pull back some spend lost to discounters. NIQ research shows that 54% of shoppers said that price discounts via loyalty cards were the promotional mechanic most likely to encourage them to spend with everyday low prices a close second (34%). This reinforces the need for the supermarkets to maintain transparent price strategies, price locks, and price matching.”
