- Despite a likely tough start to the year, the RTT predicts 2022 could still turn out to be a reasonable year.
- 2022 will bring a ‘inflection’ point for channel shift, demanding a closer convergence of online and physical shopping.
- The ESG agenda will start delivering meaningful change as retailers embrace the cost and efficiency benefits.
- Supply chain issues will continue well into 2022, but this will demand that retailers undergo the long-needed reviews and remodelling of their supply chains.
Following a year like no other, 2021 continued to present colossal challenges to the UK retail sector, including extended lockdowns, evolving guidance on social distancing, and worldwide supply chain issues.
At the latest KPMG/Ipsos Retail Think Tank meeting, members discussed their views and predictions for the UK retail sector in 2022. They explored both the trends that will shape the year and the opportunities for retailers over the coming 12 months, which, in their view, will provide the sector with the opportunity to spend less time and resources purely reacting to events.
According to RTT members, over the next 12 months, retailers must focus on the structural changes they need to undertake to rebuild their businesses and make a more profitable sector so that they can emerge in a better position than before the pandemic hit.
TRENDS THAT WILL SHAPE 2022
The disruption faced by the UK retail sector since March 2020 has been seismic. With the rapid spread of the Omicron variant and the possibility of another lockdown in January, it’s clear that the challenges from the pandemic are not over for retailers. Any new restrictions that force non-essential stores to close their doors will of course be damaging to the sector, but it’s hoped that if a lockdown is reintroduced, it will be much shorter and last weeks as opposed to months.
Retailers should also be better prepared as they now know how to operate in lockdowns, having experienced them three times in the last 20 months, but it would be imperative that the Government reintroduce the financial support mechanisms such as furlough that propped up the sector for long periods of time in 2020 and 2021.
Further to the threat of COVID-19 restrictions, RTT members are acutely aware there are a myriad of further external factors that retailers will need to accommodate for and adapt to.
Macro-economic uncertainties and geopolitical unknowns will create a difficult trading period, with RTT members highlighting inflation, cost of living increases, and the interest rate rise as most likely to directly impact retailers, particularly as demand from consumers could be sluggish in early 2022.
Ruth Gregory, Senior UK Economist, Capital Economics comments: “At the start of 2022, the best of the UK economy’s recovery will be behind us as product and labour shortages dampen growth in the first half of the year. Add to this increasing household costs for the consumer and – while the economy has become more resilient to lockdowns – unknowns with regards to the Omicron variant, and we expect spending growth to weaken in the first two quarters of 2022.”
RTT members agree that the ‘cost of living crisis’ is expected to be a theme that repeats itself throughout next year, with inflation presenting a major challenge to retailers as the power of consumers’ real incomes is diminished and demand may stutter. Nick Bubb, Retailing Consultant, Bubb Retail Consultancy, says: “While rising food price inflation shouldn’t be too much of a problem for the big supermarkets, given their position of strength with their suppliers, it’s likely to be a tough start to the year for non-food retailers as rising inflation, coupled with interest rates creeping up, could leave the UK economy at a major risk of ‘stagflation’.”
Retailers will face increasing cost pressures over the next 12 months, and while these rising costs will impact the sector for a number of different reasons including rising commodity prices, inflation and staffing, RTT members highlight the supply chain crisis as having the biggest negative effect on costs in 2022.
The global supply chain has suffered from serious disruption, and it is expected to last well into 2022. This will undoubtedly impact on retailers’ costs, as the price of shipping containers and transporting goods remains incredibly high. This is set to continue squeezing margins into the New Year, as at present, many of these additional costs have been absorbed by retailers – especially in the grocery sector. However, RTT members agree that sizable price rises are coming, as the high cost of logistics start to be passed onto the consumer.
Supply chain issues are impacting every country, but the effect has been exacerbated in the UK following the exit from the European Single Market. While RTT members expect that the majority of the supply chain issues to ‘iron themselves out’ by the end of the year, a key challenge in 2022, and one that RTT members believe is critical that retail leaders meet head on, is gaining a better understanding of their end-to-end supply chains.
World events, which are out of the control of retailers, have caused the supply chain crisis but creating better supply chains models has been long overdue. A focus now needs to be placed on the validity of ‘just in time’ supply chains and many retailers will also need to redesign their supply chains to build in more flexibility and create models of near-shore sourcing of goods. Reconfiguring supply chains in this way will give retailers more control and should soften the impact of any future global supply chain issues, whilst reducing road miles and shortening supply chains will deliver much needed efficiency and sustainability benefits to retailers’ operations.
Directly linked to the supply chain issues facing the sector and exacerbated by Brexit are the ongoing labour shortages that members expect to remain a bottleneck in 2022. Retailers now find themselves in a position where they are struggling to fill vacancies and are seeing their wage costs rise. The shortage of qualified HGV drivers is also causing further pain to the logistics sector, which directly impacts on retailers’ ability to stock shelves and keep supply chain costs manageable.
RTT members were in agreement that cost pressures will inevitably lead to price rises for shoppers in 2022. But after years of low prices and cheap goods flooding the market, it’s increasingly difficult to justify the sustainability of maintaining these low prices and it is suggested by members that increasing costs are a correction that is long overdue in the retail sector.
Implementing the ESG agenda
RTT members agree that 2022 should be the year that retailers act on their ESG agendas and deliver real, meaningful change across the industry. Even with personal finances tightening and a greater emphasis expected to be placed on price and value in the first half of the year, there is no doubt that the perilous position of the environment has become fully cemented in the public’s consciousness. Retailers that fail to acknowledge and reduce their impact on the environment and society, and further to this, fail to communicate it to their customers, will see demand for their products and services diminish in the coming years.
With cost pressures set to be a key factor in limiting success in 2022, more retailers must start to fully embrace the benefits not only to society, but also to their wider business. Paul Martin, UK Head of Retail, KPMG, comments: “Retailers have to embrace the ESG agenda within their organisations, as it’s not only the right thing to do, but it will also act as a key driver for improvement in their cost and efficiency strategies. At present driving efficiency and reducing costs to improve profitability is a critical issue for the UK retail sector – for essential retailers, the savings required could be as much as 20%, and for non-essential, 50% of their pre-pandemic cost-base. Realising and acting on the direct link between a robust ESG policy and a reduction in costs will be a vital lever that retailers will need to pull in 2022.”
The RTT agree that knowing what you stand for, but also demonstrating actionable change to consumers, will become the standard of what is expected from retailers. ESG policies need to move beyond a marketing tool, as Martin Hayward, Founder, Hayward Strategy and Futures, says: “Retailers must not fall into the trap of preaching to their customers and telling them what to think, they need to listen to the priorities of consumers or risk alienating people who would in fact embrace sensible, measurable actions. Areas such as suppliers, deliveries and packaging should be a focus, that while less appealing to a retailer’s marketing teams, will drive substantive change that benefits the planet and can add cost and efficiency savings to the wider business.”
The channels retailers use sell to consumers, and how they complement each other to create omnichannel shopping experiences, will require greater focus in 2022.
RTT members state that 2022 will bring with it an ‘inflection point’ in channel shift, and a closer convergence of channels will be required to service the evolving shopping habits of consumers. A hybrid model, which blends both digital and physical touchpoints, should be the goal for retailers who want to capture spend from a consumer that is becoming increasingly channel agnostic.
For a number of years there has been a well-documented trend of consumer demand migrating away from physical retailing towards online sales channels. This was further accelerated by the pandemic and resulting restrictions on physical trading – with online penetration increasing from 16% pre-COVID-19 to 25% in 2021. However, in 2022, the expansion and convergence of channels will no longer be limited to the traditional physical retailers which have invested more in in digital channels for years.
James Sawley, Head of Retail & Leisure, HSBC UK comments: “The last 20 years has seen online shopping and the advancement of technology disrupt the status-quo of the high street – traditional retailers have had to develop online sales channels in order to keep up with advancing technology and the changing behaviour of shoppers. However, demand for physical shopping and experiences is returning post COVID. In some cases being purely online may not be enough, in 2022 I expect to see more pure-play online retailers open stores for the first time – as seen with Gymshark soon to open in London.”
The process of acquiring customers and brand loyalty online is becoming more competitive and expensive, whilst the cost of physical retailing is declining. Jonathan De Mello, Equity Partner, CWM Retail Consulting LLP, comments: “Over the last two years many retailers successfully negotiated very favourable property deals with landlords during lease ‘events’. Rents on average have dropped by 26% since 2019, according to CWM data. Over the course of the next year, given new lease events coming up, I would expect retail rents to drop by a further 10-15%.”
The mindset around the power of the store is now evolving, with demand from consumers for experiential shopping seemingly not dampened by COVID-19. Add to this the cost benefits in terms of fulfilment and returns for operators, and having a physical high street presence has become an increasingly desirable part of the channel mix.
James Sawley went on to say: “We may be looking at physical retailing being viewed as the ‘disruptor’ in the retail sector in the coming years, attracting and retaining customers online is becoming increasingly difficult to ‘stand out’, and expensive, while stores offer a true USP and can drive loyalty and engagement.”
In the grocery sector, this structural change is expected to involve a convergence of different food channels as the grocers look to take a bigger ‘share of stomach’ in 2022. Mike Watkins, Head of Retailer and Business Insight UK, NielsenIQ, comments: “Scale and innovation are set to be the drivers of change in the food sector, as grocers adapt their models to omnichannel spending and a consumer that is agnostic to whether they shop online or instore. We should expect to see greater convergence of online, convenience, food service and food delivery business models, as shopper behaviour changes and shopping missions become replaced by shopping occasions.”
As progressive retailers look to restructure parts of their business and implement the channel convergence needed to adapt to the post-pandemic consumer, the demand for digital talent and graduate employment will also increase. Many of the headlines in the media surrounding the labour shortage and increasing wage costs have focused on low skilled workers, but retailers will also need to work hard on attracting and training the very best people with these digital skill sets into their businesses – and that will come at a cost.
THE CONSUMER IN 2022
Despite people amassing recording savings throughout the pandemic, higher inflation, a rise in interest rates, the increase in National Insurance contributions and rising utility bills will challenge consumer confidence and the spending power of households as we head into 2022.
The big question also remains as to whether the UK will be forced into further lockdowns to combat the Omicron variant, and whether any new restrictions will fundamentally change how consumers are able to shop. Even without a lockdown, RTT members expect anxiety and uncertainty amongst consumers with regards to the ongoing pandemic and the economy to lead to softened demand in the first few months of the year.
The pandemic has impacted on everyone in the UK in a way that no one could have expected. People have fundamentally changed their lifestyles and behaviours, and retailers will need to quickly assess the opportunities available to them to meet the needs of the consumer of 2022.
Maureen Hinton, Group Retail Research Director, GlobalData Plc, says: “The pandemic has led to a shift in consumer behaviour and this in turn has driven growth in new channels and routes to market – such as direct to consumer and marketplaces creating new opportunities for retailers online. New habits are becoming engrained rather than fleeting – hybrid working patterns, home centricity, health & wellbeing, digital lifestyles, online shopping, q-commerce.”
RTT members agree that certain elements of consumer behaviour which have changed over the last two years will prove ‘stickier’ than others, and the prevalence of people shopping local and independent is expected to stay. Martin Newman, The Consumer Champion, comments: “With millions of people now adjusted to a model of working between the office and home, those local independent retailers that benefited from people shopping closer to home during the pandemic look set to benefit in 2022. I also expect to see larger retailer centres in major towns and cities also continue to regain footfall throughout the year as confidence returns and people plan and shop for all the events such as weddings and birthdays that everyone has missed out on.”
The hybrid working model seems here to stay, and this places further emphasis on consumers becoming more home centric in 2022. This is set to benefit the grocery sector, and select non-food categories such as home and garden, pet food/care and electricals, and the RTT expect to see the market size of those segments continue to grow on pre-COVID-19 levels.
With more people working and spending time at home, society is becoming more digitally focussed and consumers are increasingly encouraged to be more connected to one another, the brands they buy and the retailers they shop with. This creates new opportunities for retailers, but ongoing focus and investment in technology will be needed to allow them to reach and engage with more consumers at every touchpoint in 2022.
The RTT discussed a forecast for growth in the retail sector in 2022. While predictions varied, the consensus was that the UK retail sector could expect to grow between +1-2% in the coming 12 months, despite a weak start to the new year. The sector saw +0.5% sales growth in 2020, and 2021 was a surprisingly positive year (with a likely outcome of between +6.5% and +7% sales growth) – although this was driven by strong performances in specific retail categories.
Looking closely at the three key drivers of retail health, demand, margin and cost, RTT members discuss how each will impact on retailers’ performance in 2022:
RTT members expect demand to reduce in the initial months of 2022. Following a ‘normal’ Christmas, there is the looming threat of a January lockdown that would only further exacerbate pressure on demand, which will be already weakened by the ongoing cost of living challenges facing consumers.
April is forecast to bring with it a key inflection point for demand, with inflation predicted to peak and the power of household income spend hampered further with the increase in National Insurance contributions.
Throughout the remainder of the year, it’s expected that the majority of growth will be driven by demand in the grocery sector and specific non-food categories, such as home and garden, which are likely to benefit from changes in consumer behaviour in the wake of the pandemic.
Retailers will have a choice to make in terms of protecting margins in Quarter 1. Even under the pressure of rising costs, the general trend throughout 2021 was to focus less on discounting and promotion.
Retailers may choose to continue this pricing strategy into the New Year, but if demand softens too much due to the rising cost of living and inflationary pressures, the sector could see a race to the bottom in terms of price wars to order to drive demand in the first half of the year.
RTT members agree that across all three key areas, costs will be the biggest challenge retailers face in 2022. The supply chain crisis will continue well into the year, and retailers will face rising logistics costs as well as a requirement to invest in assessing and redesigning supply chains to make them more flexible for the future.
Add to this growing staffing and recruitment costs, inflation, investment in technology, increased tax burdens and rising commodity prices, and retailers will have to work hard to manage costs and drive efficiencies throughout much of 2022.
RTT members do stress that they expect there to be further casualties in the retail sector in the coming 12 months. COVID-19 has left many retailers in perilous positions, and under the pressure of rising costs, those that are unable to evolve their structures will struggle to adapt to changing consumer behaviour.
These issues will be further confounded by further lockdowns and the end of Government support such as the furlough scheme and rental moratorium on commercial rents that have propped up the industry for 21-months. There will be a number of traditional high street retailers that fall into this category and will be at risk, but there are also signs that some pure play online retailers are struggling. RTT members also warn that there will be consolidation in the rapidly growing Q-Commerce sector.
RTT members, on balance, describe 2022 as being a ‘generally more positive year’, despite challenges surrounding supply chains, the emergence of the Omicron variant and headwinds facing the economy.
Managing increasing costs and protecting margins will be a central narrative for the first half of the year, but as these pressures ease and demand improves with a return to a sense of normality, RTT members expect retailers to head into Christmas 2022 in a stronger position.
If the year plays out without any further lockdowns, a 12-month period of stability after the stop-start merry-go-rounds of 2020 and 2021 should provide the opportunity for the best and most progressive retailers to implement the change needed to take the sector forward.
Those retailers are going to need to go through a process of reengineering business models to find the right mix between physical and online retailing to hit their ‘omnichannel sweet spot’, as well as investing in meaningful implementation of their ESG policies and redesigning their supply chains.
It’s clear that investment is required from retailers to mould their businesses and the wider sector to put them in a stronger position than before the pandemic – and 2022 may just well provide the stability they have been craving to achieve this.
PART II In detail – individual views of the KPMG/IPSOS Retail Performance Think Tank members
Paul Martin, UK Head of Retail – KPMG
When looking back at 2020 we thought it was an unprecedented year for the retail sector, something many of us had not experienced during our lifetimes. 2021 though has continued in a similar vain and unpredictability remains the only certainty for the short-term.
After 0.5% growth in 2020 – much better than many media headlines would suggest (albeit heavily polarised towards the winning categories) the first months of the year yet again saw a near complete lockdown of all physical “essential” retail locations. Therefore categories such as food & drink and products related to the home and garden witnessed a continued surge in demand, although it is important to note that those categories deemed as “non-essential” like apparel, footwear and beauty fared much better than during the first lockdown in 2020. Many retailers had learnt lessons from the previous year on how to operate during a lockdown and online penetration rates hit record levels.
I would highlight 6 key macro-headlines that have characterised the year and will continue to do so in 2022.
- Macro-economic and geopolitical uncertainties – there has been no shortage of important events both domestically and internationally in 2021 and these will continue to have an impact on consumers confidence and ability to spend. For the UK, inflation which is likely to hit a median of 4.5% in 2022 alongside further cost of living challenges and looming interest rate raises will likely have the greatest impact.
- Global Supply chain challenges – this has been well documented in the media and is manifesting itself across many countries although in the UK multiple factors including the countries exit from the single European market have further exacerbated the situation. The price of shipping containers has increased from approx. $2,000 pre-Pandemic to $20,000+ today. There is hope that the situation will start easing after Chinese New Year in 2022 although a more realistic forecast is for Q2 2023. Even if the situation reverses back to a degree of normality the over-arching question of “just-in-time” supply chains providing every product at all times remains. In addition this will lead to consumer price increases of 5-15% depending on the category and a reduction of promotions.
- Labour shortages – will remain a bottleneck for the sector in 2022. Macro-economics, geo-political uncertainties and supply chain challenges are directly linked to labour shortages. These are evident across the entire retail “source to shelf” value chain and not just for HGV drivers and for warehouse staff but also on shop-floors and in head-offices be it in creative or digital teams. The lack of labour will continue to increase consumer prices and reduce shelf availability of some products well into next year.
- Purpose and Reputation Agenda – all the coverage on Cop 26 should have brought the fact to our attention that the health of our Planet is paramount for the future and we are currently in a perilous state although for the retail sector it still remains a secondary topic at best. In a recent survey (source) of retailers top 10 priorities ESG is listed as number 8. Retail businesses will need to better understand that future profitability and cost & efficiency will be directly linked to their ESG strategy.
- Evolving Business models – the route to market will continue to fragment. Even though I do not believe that online penetration will reach 50% by 2030 and instead will reach 35-40% of the entire market with some categories substantially higher and others lower re-engineering the physical business model to a hybrid approach has be accelerated at pace.
- End of State support mechanisms – various governmental supports mechanisms such as the Furlough scheme or the Rental moratorium on commercial rents have protected the industry over the last 21 months although these are now being wound down. With insolvency rates across the UK being at record low-levels this is set to change in 2022 and there are a likely to be an increased number of retail casualties that will make the headlines from January onwards.
Therefore I believe these 6 key macro-headlines should lead to 3 key priorities for 2022.
- Focus on re-engineering your business model to survive and thrive – with the continued fragmentation of the route to market driven predominantly by the growth of the online channel most retailers will need to continue to build their digital/omni-channel capabilities and pursue partnership opportunities where building is not feasible from a cost or speed perspective.
- Supply chain resilience – fully understanding your end-end supply chain, re-designing were necessary and feasible and ensuring this topic is firmly situated at the top-table of retailers operations is non-negotiable.
- Cost & Efficiency – with costs going in one direction only for the foreseeable future a radical re-design of retailers cost models is a necessity. For “essential” retailers this is likely to be between 10-20 of their pre-pandemic cost-base for “non-essential” operators that number will be higher and could even be up to 50%.
These three priorities should be combined with the answers to two foundational questions – what is your purpose and how do you demonstrate that you stand for more than just making a profit? Whilst in parallel knowing who your customer is.
No doubt 2022 will deliver plenty of opportunities and challenges. The UK economy is predicted to grow between 1.8% and 4.2% in 2022 (KPMG analysis) and the UK retail sector between 0.8 – 2.2% (waiting for confirmation). Ultimately, a degree of unpredictability remains the only certainty for 2022, therefore controlling the controllable has to be the focus.
Nick Bubb, Retailing Consultant, Bubb Retail Consultancy Ltd
Stockmarkets hate uncertainty and the unwelcome news about the new Omicron Covid variant on “Black Friday” caused a mini-crash on November 26th, but investors soon regained their nerve and the assumption is now that the Omicron variant isn’t serious enough to de-rail the economic recovery and so world stockmarkets seem embarked on their traditional “Santa Rally”.
In terms of the outlook for 2022, the UK stockmarket is too focused on the big shifts in Non-Food sales mix and channel mix that are taking place in Retailing to take a big view on the general economic outlook.
The FTSE General Retail sector is running about 10% up cumulatively in 2021, which is only fractional behind the rise in the All-Share index. The FTSE Food Retail is doing slightly better, thanks to the Morrisons takeover, with an increase of about 12.5% to date, but it would look much stronger, but for the recent weakness in Ocado.
Just as Ocado/Online Grocery was one of the big winners of the lockdowns in 2020, so too were the Online Non-Food retailers, but they have fallen heavily out of favour in recent months, with trading momentum under pressure from the very tough sales comps and margins undermined by the supply chain pressures in the industry. In the case of AO, the big sentiment shift against Online retailers has been compounded by its exposure to another sub-sector that has lost momentum since the big rush to “work at home” 18 months ago, namely Household Goods. AO was one of the star performers in 2020, but its shares have suffered an equally sharp sell-off in 2021.
Fashion retailers have stormed back into favour in 2021, however, as exemplified by the strong recovery of Marks & Spencer, boosted by better management of the business and by the clothing market share that came free from the demise of Arcadia and Debenhams a year ago. For related reasons, shares in Frasers Group have also been good performers in 2021, although neither M&S nor Frasers has been able to match the astonishing rise of Watches of Switzerland, whose increasing success shows that there is no lack of rich people on either side of the Atlantic.
As far as 2022 is concerned, the cost-of-living crisis will be one of the big themes, as rising inflation cuts into real incomes and there must be a major risk of “stagflation”, with the economy stagnating as interest rates edge up to try to control inflation and with the housing market coming under pressure. That is likely to mean a tough year ahead for Non-Food retailers, despite the big middle-class “lockdown savings” mountain and the hope of a boost to TV sales from the World Cup in Qatar at the end of 2022 (pandemic permitting).
Rising food price inflation isn’t necessarily a bad thing for the big supermarkets, however, given the muscle that they have with suppliers. And after the Morrisons takeover, the M&A cycle in the Food Retail sector probably isn’t over, with Sainsbury having to look over its shoulder at the private equity firms that lost out on Morrisons and with the potential sale of Boots by Walgreens likely to interest Tesco (notwithstanding the eagle eye of the CMA).
Maureen Hinton, Group Retail Research Director, GlobalData Plc
There is still a great deal of uncertainty about the future as we learn to cope with new COVID-19 variants and outbreaks, but after nearly two years of living with the pandemic, retailers have had to adjust to uncertainty and be fast and creative in devising strategies to cope. This experience will be invaluable in adjusting to continuing uncertainties. That said there are three factors retailers will need to accommodate in 2022.
1) Inflation and the impact on demand
Consumers are facing higher household bills as commodity, energy and fuel prices are all pushing up inflation. They are also concerned about interest rates rising which will impact mortgages and credit borrowing. As the support government supplied during the peak of the pandemic is withdrawn there will be more concerns about income, despite the tight labour market. Food prices are already rising, and this will predominately affect the level of money shoppers have remaining to spend on discretionary non-food items.
Meanwhile retailers are facing the same increases in costs along with continuing supply chain issues. Inflation is forecast to ease marginally as energy prices come down in 2022, but the lag time for retailers will mean prices will continue to rise over the next few years as they are forced to pass some of these increased costs onto the consumer. They are also facing higher employment costs as the national living wage increases by 6.6% in April, national insurance contributions rise, and business rate relief ends.
GlobalData runs a monthly survey of UK consumers gathering their current and future views on a variety of subjects including their financial situation, economic outlook, and spending intentions and the latest survey (November) shows consumers intend to hold back on spending over the next six months across the country.
The outcome is:
- Value for money will become more important as shoppers are forced to cut back
- Inflation will drive growth, not volumes
- Clothing & footwear will remain the most impacted with spend not recovering to 2019 levels until 2023
- Retailers will need to build more flexibility into their supply chains and reduce supplier dependency
2) Pandemic living & working habits become mainstream
As new variants continue to emerge, we are learning to live with the pandemic. 28% of UK consumers do not think life will return to ‘normal’ until 2023, while another 25% think it will be late 2022. The pandemic has led to a shift in consumer behaviour and this in turn has driven growth in new channels and routes to market – such as direct to consumer and marketplaces creating new opportunities for retailers online. New habits are becoming engrained rather than fleeting – hybrid working patterns, home centricity, health & wellbeing, digital lifestyles, online shopping, q-commerce.
We are all constantly connected, and all our interactions are being encouraged to take place in the digital world which will continue to have an impact on physical shopping and locations. The power of social media will strengthen as social and transactional interactions increase.
Online shopping penetration will moderate as physical retail opens more consistently, with sector penetration differing from the 63% penetration in electricals to the 16% in food & grocery (the latter being double the rate it was in 2019). Though food & grocery has one of the lowest penetrations, because it is such a large sector in terms of value it will account for 45% of all online spending.
For retailers this means yet more investment in the technology that will reach, and engage with, consumers through every touch point, and investment in their operations to increase speed and efficiency. The rising cost of human labour, and restricted supply, will encourage more automation and further reappraisal of physical stores, their purpose and location.
3) ESG – Executing sustainable and environmental policies
Though consumers on tight budgets will be prioritising price and value, there is growing concern about the environment and waste – 52% of consumers say they are more loyal to brands that support green/environmental matters, therefore retailers that can deliver on value as well as prove their sustainability credentials will have an edge.
Furthermore, product circularity solves the value issue for consumers – they can buy and sell products direct to other consumers, replenishing their income as well as their wardrobes and household items. This is becoming a serious threat to retail spending via traditional retailers, hence the step up in initiatives to become intermediaries in this process.
Currently ESG is being driven by investors and governments, and companies are having to devise their environmental, social and governance policies and provide transparency on their initiatives. The execution of their sustainable and environmental policies will be crucial. This is where companies can make the most impact and demonstrate clearly to consumers their seriousness about these issues.
2022 will continue to be a trying year for retailers, but we are learning to live with the pandemic, and the learnings that have come out of the past two years will be a strong foundation for the future.
Mike Watkins, Head of Retailer and Business Insight UK – NielsenIQ
We can reflect upon 2021 as a year of a retail reset in UK triggered by the once in a generation dislocation of shopping behaviour due to the pandemic. However, the impact on food retail is going to be longer lasting with 3 changes in shopping behaviour expected to gain further momentum in 2022.
Firstly, omnichannel spending has finally arrived and shoppers are agnostic to whether they shop in store or via a digital platform. Online purchasing looks to be evolving with smaller spends than we saw in February at the peak of the lockdowns. But shoppers are sticking with online as almost 3 in 10 households are now regular fmcg shoppers every month (NielsenIQ Homescan) and we expect spend to normalise with around a 12% channel share in 2022. Demand continues to grow so there is potential to return to a 15% share of sales in the next 2 years if capacity is maintained by retailers. This is accelerating the shift in spend from the largest stores to online with smaller store formats e.g., less than 10,000 sq. ft benefiting from a progressive return to shopping `little and more often`. Smaller stores are expected to grow sales and other channels with upside could be Value Retail and Discounters. With volatile comparatives it is challenging to estimate the top line food retail growth in 2022 but c. 3% is feasible across the £190b channel (NielsenIQ) with some inflationary push. Volumes could be negative with high Q1 comparatives and more `lockdown consumption` shifting back to the (slimmed down) hospitality channel.
Secondly, there will be a convergence of online grocery, convenience retailing, food service and food delivery business models. Further consolidation across aggregators, platform providers aswell as retailers is likely as scale and innovation are the drivers of change. The channels have overlapped so shopping missions are going to be replaced by shopping occasions and this evolution has the potential to lead to more structural change. Despite an uncertain economic environment with 4 in 10 shoppers still feeling constrained (NielsenIQ Survey), retailers will need to focus on meeting the `new` lifestyles needs of shoppers.
Finally, shoppers have been forced to change habits these are the ones most likely to continue: supporting local businesses, more at home meal occasions, interest in provenance & quality, buying more fresh foods, sustainability and health concerns all wrapped in a savvy mindset and the adoption of technology. And there is a lasting impact from families, commuters and holiday makers buying more groceries locally with 25% intending to shop at the closest store more often post pandemic (NielsenIQ Survey).
These changes where we shop, how we shop and what we buy in terms of food, nutrition and dietary habits will become clearer in 2022 and all have the potential to step change the retail landscape in a way we have not seen since the end of the economic crisis over 12 years ago.
James Sawley, Head of Retail & Leisure, HSBC UK
Sadly we are not out of the COVID woods. Europe is experiencing a surge with some aspects retail closed again. In Northern Ireland, work from home has been advised. England appears defiant and wants the population to learn to live with the virus. Then we have the unknowns of Omicron and ensuing ‘variants of concern’. If I wasn’t a glass half full type of person, one could get bogged down with all the headwinds facing the sector and economy, but I genuinely believe 2022 will be a year of positivity (it’s all relative) and increased stability.
Firstly, supply chains disruption will stabilise gradually throughout the year and will be near normal by Christmas 22, this will be driven by a normalisation of demand from its current highs, and the numerus cogs in the global, capitalistic, economic doing what it does best in self-regulating through competition, thus fixing the ‘kinks’ and ironing out the supply /demand imbalances which have led to ‘profit gauging’. Secondly, consumer shopping patterns will stabilise not too far from pre-pandemic levels. The UK was already one of the most mature and advanced adopters of multi-channel retailing, so what appears has been an increase in non-food penetration from 35% to 40% and 7% to 12% for food, I believe we are very close to the stabilisation point until the next wave of technology (driverless cars, automation, robots, AI) disrupts life further (at least 10 years away). Thirdly, I believe 2022 will be the year where we start to see a mind-set shift back to physical retail, driven by 3 key factors. 1. The cost of physical retail in terms of rents (and eventually rates) has structurally declined, while the cost of acquiring customers has increased (online oligopolies & growing demand), this inflection point turns the economic equation on its head. 2. COVID has proved that physical retail is not dead and consumers still crave it, & 3. Stores act as locations to engage with customers to drive brand loyalty (something which is very hard to do online) as well as mini fulfilment hubs in a world where speed and convenience is king. The other mind-set shift is the way retailers measure channels, we need to get away from thinking about store sales and online sales, they will increasingly be viewed as homogenous. The more progressive retailers are already thinking this way.
So what change is more permanent? Well, hybrid working isn’t going away and whether that means working from home 1 day or 2 days a week, consumers will be spending on average c15-30% more time at home. This I suspect unsurprisingly will result in more discretionary spend being spent on the home/garden and outdoor & leisure pursuits, so fundamentally the market size of each of those segments will grow on pre-covid figures. The same rationale applies to grocery, more time being spent at home equals less money being spent out of the home/at work (less coffee and lunches). Similar logic dictates the Pet food/accessories/care segment has changed for the foreseeable future – cats and dogs aren’t just for Covid. In summary, I’m cautiously optimistic but it won’t be a smooth path and there will likely be some set-backs. Inflation is the biggest risk unless carefully managed, and, linked to inflation, I’m concern ill-managed energy transition is a risk to high and volatile energy prices being a permanent feature of the economy. My overacting reason for being positive though is that COVID has cleared out a lot of legacy business models, leaving the very best and most progressive companies to take us forward.
Martin Hayward, Founder – Hayward Strategy and Futures
The sky didn’t fall in, there’s petrol in the tank and there’s turkey and discounted booze galore on the shelves.
The extraordinary state of public discourse at the moment, where almost every conversation is politicized and bizarrely viewed through a lens of Brexit vs Remain, Woke vs Un-woke, makes sensible, objective discussion of almost anything very hard. It was almost as if some were wishing for shortages and crises and even more lockdowns to prove some political cause rather than getting on with the job.
Thankfully, everything looks pretty OK and Christmas will be good for retailers across the land.
Next year also looks promising. We are close to full employment for those who choose to work, consumer finances remain buoyant following the lockdown savings bonus that most households enjoyed, and fingers crossed, the worst of Covid is behind us.
On the headwinds side, inflationary pressures will persist for longer than most economists predicted driven by the cost of goods and wage inflation in a tighter jobs market, although this correction to suppressed wages due to previously unlimited labour supply should be broadly welcomed by the indigenous population.
Growth in on-line retailing will continue to slow post-pandemic as long as retailers are brave enough to invest in their store estate. Many, particularly the younger, will continue to be keen to socialise widely having spent longer than is healthy locked up in their own homes. Additionally, the real cost of home delivery will continue to become more apparent, and hopefully the government will act on many of the recommendations made to reduce the huge inefficiencies, questionable working practices and environmental costs of home delivery and tax manipulation by global online companies.
The High Street, particularly in more affluent areas, should continue to benefit from more hybrid working patterns increasing footfall during the week.
Finally, retailers need to be careful that their Environmental, Social and Governance (ESG) teams don’t wield too much power. There are signs that those who work in this area are becoming rather over-zealous in their desire to preach to their customers, at risk of alienating the vast majority who welcome sensible actions, but resent being told what to think.
All in all though, not a bad year ahead.
Martin Newman, The Consumer Champion
With the steep rise in inflation, energy costs and the cost of goods outstripping wage rises, consumers will be in a heightened state of anxiety in the coming year. Continued concerns over new Covid variants and supply chain issues will add to this.
All of which is likely to lead to consumers continuing to adopt a more conservative approach to spending while household savings increase.
That said, we will be indexing against 2021, with lockdowns, restrictions and the subsequent impact that had on trade for much of the first half of the year. So, a move towards increased savings will to some extent be balanced by the full and unfettered return to Weddings, Wimbledon, Football, The Open, Theatres, Gigs, Clubbing, Comedy, Cinemas, days out. It remains to be seen to what extent the new Omnicron variant will impact international travel, but my instinct is that most of the disruption from this will be experienced in 2021 and early 2022.
Taking the above into account, 2022 is likely to comp slightly better than 2021.
Categories that performed well from a demand perspective during lockdown such as Grocery, DIY, homewares, electricals, home exercise equipment, coffee machines etc will soften as we’ll all be spending a lot more time being out and about. This said, the trend to ‘nest’ and create ever-more comfortable home environments will continue. So, while these categories will not experience the same spike in demand of 2020 and the first half 2021, they will still perform well in 2022.
Growth in online sales will continue but at lower rates than in 2020 and early 2021. Growth will be around 10% to 15% down from the giddy heights of 100% plus that many brands enjoyed during lockdown.
Ecommerce’s overall share of retail sales will increase from around 27% to 28% by the year end and online grocery will account for around 17% of total grocery sales.
The hybrid model of spending half of our week in the office and half at home will continue to see local independent retailers doing well.
Larger retail centres such as the west end and other major towns and cities will continue to regain footfall as we look for some pick-me-up retail therapy and get ourselves ready for all the events we have planned as well as the continual pattern of employees spending more time in the workplace than they did in 2021.
The combination of increased consumer anxiety, more focus on saving than spending, continued issues around the supply chain and rising costs around recruitment and resources will make for another challenging year for retailers.
But it should be a marginally better year than 2021.
Jonathan De Mello, Equity Partner, CWM Retail Consulting LLP
COVID has catalysed significant change on the high street, with the demise of the likes of Debenhams and Arcadia Group – with hundreds of stores between them – the most recent casualties in a long list of retail business failures stretching back to the demise of Woolworths in 2008. This has led to significant retail vacancy, with high streets the hardest hit asset class, as a significant volume of ‘physical’ consumer spend shifted online during various lockdowns. Whilst consumer spending – and spend in physical stores – has now bounced back somewhat (now c.5% ahead of pre-COVID levels according to Barclaycard data), online spend continues to remain high (c.24% above pre-COVID levels, according to Barclaycard).
The supply chain crisis that has dominated headlines in recent months will likely extend to the end of Q1 2022. Whilst it will certainly impact retailers in the run up to Christmas at a time when they can ill afford it, it did force a less promotional Black Friday – with lower participation rates than prior years, and less deep discounting. Christmas is crucial for many retailers given the lockdown we experienced at the start of 2021. Poor Christmas sales – which is possible given renewed restrictions due to the Omicron variant – will impact profitability considerably and, from a landlord perspective, will likely mean increased rental default. We could potentially even see a further extension to the rent moratorium due to expire in March 2022. Whilst quarterly rent days are less important now than they were pre-COVID, as many retailers have negotiated monthly/turnover rent deals since then, any extension to the moratorium – in light of how indebted some major landlords are – will certainly not be welcomed by property owners.
In addition to the ongoing supply chain crisis – and potential for the Omicron variant to dampen consumer spending in the coming months – retailers face other potential headwinds moving into 2022, such as a potential interest rate rise due to increasing inflation, which would further impact consumer spending. Independent retailers – having been net beneficiaries of various lockdowns due to increased local spending – also face a potentially more challenging climate, with the end of government rescue funding for small businesses coupled with a return to the office. Although working from home in some capacity is here to stay, the balance has – and will continue to – shift in favour of spending more time in the office as opposed to at home in 2022.
Despite this rather negative backdrop, a number of retailers are now looking to expand – taking advantage of relatively low rents, in order to extend their physical store networks. Some retailers with strong alternative distribution channels (such as online and wholesale) did not just survive during the height of COVID, but actually thrived – given a substantially lower cost base due to the furlough scheme, suspension of business rate payments, and the rent moratorium. Many also successfully negotiated very favourable property deals with landlords during lease ‘events’ – which further boosted underlying profitability. One retailer I spoke to recently – having opened zero new stores prior to COVID – has actually opened 15 new stores since, given the attractive property deals available. They are by no means an exception, with countless other examples of retailers taking the opportunity to expand their physical store footprints. Rents on average have dropped by 26% since 2019, according to CWM data. Over the course of the next year, given new lease events coming up, I would expect retail rents to drop by a further 10-15%. There will clearly be a lot of variation in this by location type – with the strongest centres not witnessing as much of a fall – but while an excess of retail space exists in the UK, material rent increases cannot be achieved by property owners without significant asset management.
Given this excess retail space, it is good that the government have worked to change planning laws to allow for easier conversion of redundant retail space into other uses – and investors have embraced this, with myriad repurposing plans encompassing single units all the way through to entire malls. A popular change of use – particularly in city centres and especially in and around London – is residential. Conversion to office space in central locations has also proved popular, with some of the major West End department stores, including John Lewis, M&S and Fenwick all with works underway to turn less productive retail space on upper levels into office space. This trend will most definitely continue into 2022 and for the foreseeable future; coinciding with the rise of a new breed of community centre – offering a place to live, work, shop and play. Many landlords I have spoken with are planning such schemes – typically working closely with local authorities, to ensure wide stakeholder engagement. Often this involves a net reduction in retail space in favour of the creation of a mixed use centre – which can include residential, office, hotel, health and wellness, retail, leisure and other uses.
Whilst both retailers and property owners will face significant challenges in 2022 therefore, it will also be a year of opportunity for those that have the wherewithal – and the tenacity and courage – to embrace change, whether through physical store expansion, or through the repurposing and creation of new futureproofed community centres.
Ruth Gregory, Senior UK Economist, Capital Economics
Over the next six months, we had already thought that the intensifying product and labour shortages (see Chart) would put the brakes on the economic recovery. At the same time, that higher energy prices would drive up CPI inflation from 4.2% in October to a peak of about 5.0% in April next year. And that higher utility prices and the 1.25% increase in National Insurance tax contributions from April 2022 would reduce the real spending power of households to the tune of £16.5 billion, or 0.6% of GDP. The big risk now is that the arrival of the Omicron variant leads to weaker near-term activity and exacerbates the current global and domestic shortages that have helped to push up CPI inflation to twice the 2% target.
Capital Economics Indices of Shortages (Standard Deviations)
It is too early to say if the Omicron variant will prove to be very transmissible and increase hospitalisations. But the chances of a higher number of infections leading to more consumer caution and/or further restrictions have increased. The one crumb of comfort is that the economy has become more resilient to lockdowns. It’s incredibly uncertain, but a two-month lockdown starting in January could reduce GDP by something in the region of 3.0% m/m and leave at 3.0% below the February 2020 pre-crisis peak. (See Chart.)
Real GDP (February 2020 = 100)
Meanwhile, there is a risk that unlike previous waves of the virus, which were on balance disinflationary, a major new wave with or without a lockdown could be inflationary. The economic backdrop is now very different than in previous waves of the virus. Supply chains are already stretched. And a virus-related surge in good spending, port closures or workers temporarily exiting the workforce, could exacerbate existing supply strains.
That probably means the Bank of England will still lift interest rates before long. For what it’s worth, we expect the Bank to raise interest rates from 0.10% to 0.25% in the coming months. But our forecast that CPI inflation will be close to the 2.0% target in late 2022 and 2023 suggests the Bank of England won’t need to raise interest rates to the level of about 1.0%-1.25% currently priced into the financial markets by the end of next year.
Overall, the big picture that emerges is that the best of the consumer recovery is now behind us. The growing headwinds for real household disposable income means that spending may be weaker than most expect over the next six months. And while much remains uncertain, the risks to our (already subdued) activity forecasts appear to be to the downside.