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Retail Think Tank

Get ready for retail’s third wave of disruption

What is the outlook for the retail sector over the next 12-18 months, as core inflation shows no signs that it will decline?

Summary statements

  • Retail faces a third wave of disruption as a result of higher interest rates and their impact on customers’ spending power
  • Inflation – and its aftereffects – will be with us for another 3years
  • To survive and thrive, retailers need to take a more realistic view of the resulting pressures on their businesses, and then take radical steps to address them
  • There are practical steps retail businesses can take now to deal with both current realities and future prospects


Business disrupted – the third wave

Retail is once again at a tipping point and faces a third wave of disruption in as many years.

Having already faced and responded to the disruption caused first by covid and second by inflation, now spiralling interest rates threaten to exacerbate the current cost-of-living crisis, significantly affecting the long-term spending power both of mortgage holders and private renters.

This interest rate-driven third wave of disruption will have an arguably more significant, deeper felt and longer-tail impact on customer spending than covid and the cost-of-living crisis combined, the Retail Think Tank (RTT), an independent group of retail experts, warns.

And this will require retailers to fundamentally restructure their operational models to ensure their success – and very survival.

“Looking ahead to the next 12 months we expect trading conditions for the retail sector to remain challenging. Inflationary driven downturns are usually much lengthier than other financial shocks to unwind, normally three to five years. Inflation and its impact on our economy isn’t going to be a short blip, it is going to be a lot more long-winded.”

~ Paul Martin, UK Head of Retail, KPMG

The RTT concludes that, in response, retailers need to be sharp in focus, understand their customers better, and get cost and business models right, otherwise failure beckons. To manage these disruptions, retailers will need to know their customers, differentiate themselves from rivals, communicate a strong and meaningful purpose, and execute very well, notably with greater assistance from technology.


Taking the pulse on current retail industry performance

Demand from consumers remained flat in Q2 2023 according to the RTT’s latest Retail Health Index (RHI), helping to offset the rising cost and margin challenges facing retailers as they battle rising wage bills and margins being diluted through an increasing number of promotions designed to drive footfall and sell through on excess stock.   Indeed, even the advent of three bank holidays in May with the King’s Coronation failed to shift the dial on consumer demand in Q2.

Retailers have been working hard on margins, with more investment being ploughed into this area than seen in recent times, according to the RHI.  Absorbing price rises in order to drive demand and keep prices lower, whilst trying to protect market share is having a significant impact and weakening the overall health of the sector, with growth coming at a cost.

However, the RTT predicts that the tipping point will come in Q3 2023, with the outlook for consumer demand likely to fall further as pressure on consumers’ disposable incomes reaches a watershed moment, and consumers batten down the hatches.

It expects the RHI in Q3 2023 to fall -1 point to 69 points, a figure last seen in Q3 2020 when the UK was in the midst of tiered lockdown restrictions and just +7 points higher than Q2 2020, the beginning of the covid pandemic and the first UK lockdown.  Retail health in Q3 2023 is also expected to be -23 points lower than it was in Q3 2008, which saw the start of the Financial Crisis and Credit Crunch, following the collapse of major US investment bank, Lehman Brothers, in September 2008.


It can only get worse before it gets better

Even a cursory assessment of the current figures on consumer costs and retail sales must carry a health warning.

Data from RetailNext’s footfall index, which captures billions of store visits each year globally, showed that even though shopper traffic – a key indicator of High Street health – remained +2% up year-on-year in Q2, it dipped by -5.2 percentage points quarter-on-quarter, suggesting consumer confidence had also taken a tumble.  Indeed, while the hottest June on record prompted a 0.3% month-on-month increase in retail sales in July according to the ONS, UK consumer confidence took a dramatic six-point dip in the GfK Consumer Confidence Index.  After confidence showing steady signs of recovery in the past six months, GfK warns resilience is starting to collapse as reality starts to set in for consumers about the impact of stubbornly high inflation and the threat of mounting interest rates.

“To date, we have been surprised by the resilience of consumer spending underpinned by the labour market, wages, savings, and improved household balance sheets post-covid.  However, it now looks like we are in for a long slog of high and sticky inflation and interest rates.”

~ James Sawley, Head of Retail & Leisure, HSBC UK


It is predicted by the Bank of England that, with interest rate rises, around 1million UK homeowners will be paying £500 more a month to cover mortgage payments by the end of 2026, while half of the UK’s 4million house owners looking to sign or renew mortgage contracts in the next three years will pay £200-499 more a month.  While the focus has mainly been on mortgage holders, the Guardian warns ‘millions’ of renters across the UK are being squeezed by record rent increases as landlords pass on higher mortgage costs to tenants.

“Back in January, there was a strong consensus that the second half of 2023 would see a recovery in consumer spending, as inflation came down,” retail consultant, Nick Bubb, comments. “But now, after a surprisingly resilient first half, the worry is the much-feared recession will materialise, as interest and mortgage rates head much higher than originally expected.”

The impact of this sizeable and sustained blow to household budgets is significant for the retail sector, even allowing for some resilience in consumer spend in recent months.  “So far, consumer spend remains resilient, but it isn’t buoyant,” says retail technology author and publisher, Miya Knights. “So far, in the cost-of-living crisis, consumers have been spending their savings and not their earnings.”  With consumers topping up their salary-spend with savings, Knights questions how long this pattern of spending is truly sustainable.  “If consumers are already emptying their savings and their covid ‘war-chests’, how long can that last?”, she asks.

“This was initially a K-shaped crisis: until recently, the middle classes have been largely resilient despite inflationary pressures,” retail consultant, Natalie Berg, adds.  “A strong labour market and pent-up pandemic savings have helped many to weather the storm, but this resilience will be tested as rising mortgage costs eat into disposable incomes.”  Echoing Berg, former GlobalData director, Maureen Hinton, warns the interest rate fuelled spending squeeze will start to hit new cohorts. “The poorest have been hit the hardest so far, but the rise in the bank interest rates will put pressure on homeowners and landlords renewing mortgages, spreading the pain into new income groups.”


All change – a polarised sector, with growing pressure on retail’s ‘squeezed middle’

With these long-term and profound changes to consumer behaviour, the RTT predicts the retail sector will become even more polarised as the ‘squeezed middle’ is edged out by the growth in discount retailing.

Currently, discount retailers’ market share accounts for 20% and is growing rapidly, which will give way to value-led retailers at one end of the sector, and experience-led retailers at the other.  This squeezed middle, gripped by declining margins and dwindling demand, will be less able to invest to respond to the massive changes in the way people now shop, less able to offer and demonstrate value and a strong proposition, while also being constrained by an inability to respond quickly.

Pressure on pureplays, already burdened by rising customer acquisition and engagement costs, a rise in store traffic, high returns and infinite online competition that has put up their operational costs, will force them to reinvent or struggle to compete.

The winners and losers, both across and within categories, will be defined by their willingness to change, how much capital they have available (a big question mark hanging over any retailers heavily indebted by private equity ownership and now with higher debt servicing costs), and organisational structures that enable them to collaborate, a critical success indicator in omnichannel retail.


Winners and losers

As a result, the RTT anticipates that there will be both winners and losers over the next few years, even some casualties, both online and on the High Street if consumer demand contracts as is expected towards the end of the year.

Electrical categories, toys, tech and home related sectors, which did well during the covid lockdowns, have struggled to see positive sales growth this year and will continue to suffer as household incomes decline.  To date grocery, health and beauty categories, along with clothing retailers with strong brands and desirable product ranges, have benefitted from pent up demand since covid.  Event-led buying, such as holidays and occasions, have boosted sales, but this trend is likely to slow down if economic conditions worsen.

With latest *RPC data pointing to retail and leisure insolvencies up 56% in the past year, the RTT believe a downturn in consumer demand will see this trend accelerate.

“Whilst the larger retailers are generally trading at sustainable levels, the majority of these insolvencies will be independent retailers, who have seen the twin impact of falling demand for local High Streets in light of hybrid working patterns, and higher business rates,” Jonathan De Mello, Founder & CEO of JDM Retail, comments.  However, he concedes that the larger retailers are not exempt from distress, especially given ever rising costs – with big High Street names planning to close stores over the course of the rest of 2023.   It is also likely that a small number of mid-market retailers will continue to struggle and end up in some form of process.   Multi-channel businesses are likely to continue to outperform their online peers, who achieved record growth during the pandemic but are now struggling across most categories, as consumers warm to shopping in stores again.

The situation facing grocers is a similar one, with some performing very strongly, particularly the discount supermarkets, who are gaining more shoppers and collectively have a higher share of wallet than in 2022, as the quest for lower prices begins to replace location and loyalty as the drivers of store choice.  Whilst others, especially those not being able to differentiate themselves, will struggle to maintain market share.

“With 90% of all households making savings on their grocery bills (NIQ Homescan), this may lead to permanent changes in consumer spend, as lifestyle needs and the quest for lower prices replace location and loyalty as the drivers of store choice.”

~Mike Watkins, Head of Retailer and Business Insight UK, NIQ

As higher interest rates are expected to remain high for some years to come, cutting into consumer incomes and suppressing spending power, the RTT is clear that retailers must make even more profound adjustments to their operational and technology strategies.

Already retailers have worked hard to protecting margins, with more investment being ploughed in this area than seen in recent times.  However, as they absorb price rises and offer promotions and discounts in order to drive demand and keep prices low, while trying to protect market share, there is a significant impact which has weakened the overall health of the sector; growth, where it has been achieved, has come at a cost.


Three action points

What are the key steps, and trip hazards, to ready retail businesses for the changes needed in response to the new industry landscape and evolved shopper? The RTT identified three key areas in need of transformation.

  1. Investment in technology

Urged to invest over many years, the dial on tech investment as a proportion of turnover has barely moved in 20 years, but the truth is, there is already a hole in UK retailers’ current tech investments, according to KPMG’s Paul Martin: “if you are a true omnichannel player, you should be spending 4-8% of your revenue on technology per annum, but most grocers are spending 1.5-3%.” 

And the challenge becomes even more complex when you consider that current unique set of challenges demands a more creative approach to technology budgeting, development and deployment, as Knights points out: “European retailers traditionally save their way out of recessions in regard to rationalisation, consolidation and cost, while North American retailers like to spend their way out of a recession.  The UK is in a bit of a conundrum because of that – in order to achieve the efficiencies needed, retailers must find the money to invest without taking a big hit on margin or cost.”

While many retailers are looking towards automation as part of their tech roadmaps, use-case benefits and value – both to the retailer and to the consumer – must be prioritised.

“Investing in tech for the sake of investing is not the answer,” according to KPMG’s Paul Martin.  “It has to be spent on better understanding the customer and ultimately on reducing the cost to serve whilst maintaining and enhancing the customer experience.”  Customer-centricity remains key, as RetailNext’s Head of Sales, EMEA & APAC, Gary Whittemore, adds that “to overcome the challenges posed by inflation, the retail sector must adapt and innovate to cater to evolving consumer preferences. Businesses that can effectively leverage technology and embrace omnichannel experience are better positioned to thrive.”


  1. Operational efficiencies

Achieving greater operational efficiencies, which is about balancing cost with productivity, is a tougher challenge than in the past.  Pulling all the obvious cost-saving levers, such as reducing headcount, won’t work this time because, if there are not enough staff on the shop floor, customer service is compromised.  And for omnichannel retailers, cutting staff in the call centre, will also spoil the customer experience and lead to both lost sales and loyalty.  Worse, retailers may end up with gaps in their business that make it harder for customers who are used to an omnichannel experience and consistent service across every channel.

KPMG’s rule of thumb on costs is that grocers need to have a plan to reduce their cost base, compared to pre-covid cost structures, by 5-12%.  For non-food that figure is 5-25%.  Accepting that these figures are high, the company has a list of 265 levers retailers could pull to reduce your costs but only about 12 of those relate to headcount.  These other – and arguably more effective – levers relate to other areas including supply chain and fulfilment, replenishment, cross-channel processes and data analysis.


  1. Know your customer

Moving from optimising vertical functions to horizontal optimisation and understanding how demographic disparity inflicted by interest rate rises, which will remain in place far longer than the ongoing inflationary driven cost-of-living crisis, will change customers in the long term.

Already, their behaviour has changed so dramatically, that retailers stand little chance in serving them unless they understand them.  KPMG’s Martin adds, “Unless you are in luxury, product is secondary now.  Customer understanding will always trump product.  The days of trading your way out with great product is over.  You only have great product if you know who your customer is; it’s not horse before cart.” 

Retailers will have to “do more with less,” says Berg.  “The cost of doing business is considerably greater and far more volatile than it used to be which, combined with subdued consumer demand, is dangerous territory.  Many retailers feel like they are in a permacrisis. Operating in firefighting mode may be essential to get by in the near term, but it’s important not to lose sight of the customer and their continuously evolving needs.”


Fast forward

Retail, to its distinct advantage, is resilient and it can address the challenges ahead.

Current market conditions and their prospects taken as a whole might point to an apocalypse, but great changes will always signal great opportunities.  Of course, as always in a crisis, some retailers will not come through unscathed, particularly those whose finances, governance and culture may prevent them from responding in time or in the best way.

And yet, consider the often extraordinary measures taken by most retailers in response to the pandemic and its aftermath, and we can see that the industry has track record when it comes to making dramatic changes.

Given what is to come, now is not the time to lose pace, rather for retailers to accelerate on all fronts, building on insight into their customers, automating in recognition of their staffing challenges, and removing the operational barriers between channels to drive long-term business health and performance.


PART II In detail – individual views of the KPMG/IPSOS Retail Performance Think Tank members

Paul Martin, UK Head of Retail – KPMG


The UK economy has so far avoided a technical recession which was widely expected throughout 2022. The government has provided households and businesses with some support against higher energy prices, including a cap on household utility bills. A tight labour market has kept a lid on unemployment, while excess savings accumulated during the pandemic have been gradually used up, alleviating the squeeze on real incomes. Nonetheless, the impact of monetary tightening is yet to fully feed through to the economy, slowed in part by the stock of fixed-rate debt which hasn’t reached maturity. We expect these headwinds to continue to drag on UK activity throughout this year. GDP is still 0.5% below its pre-pandemic level at the end of 2019, with consumption down by 2.3% and business investment 1.4% lower. This lacklustre performance, if sustained, could lead to annual GDP growth averaging 0.3% in 2023, relatively weak by historical standards. We see downside risks to this forecast, however, given the ongoing stickiness of UK inflation, recent tensions in the banking system, the uncertain impact of such rapid rise in interest rates on the economy, and ongoing geopolitical tensions.

Inflation continues to moderate, but at a slower pace than previously expected. Annual headline CPI inflation eased to 8.7% in April, down from 10.1% in March and a peak of 11.1% in October 2022 although remained unchanged in May 2023.The fall in April was predominantly driven by last year’s rise in electricity and gas prices falling out of the annual comparison. Nonetheless, inflation was higher than both market (8.2%) and Bank of England’s (8.4%) expectations. This surprise came from the underlying (core) components of inflation, suggesting that price pressure

could remain elevated for longer. Indeed, core inflation (which excludes energy and food) accelerated to 6.8%, its highest level since 1992, while the weighted median and trimmed mean measures have also picked up. This provides significant risk to KPMG’s current forecast, which sees headline inflation moderating to 5% by 2023 Q4, averaging 7.7% in 2023 and 2.9% in 2024 (UK Economic Outlook Report)

Consumer confidence has bounced back, closing some of the gap relative to business confidence (GFK Index). The headline index rose for the fourth consecutive month in May, with broad-based improvement across the balances for personal financial situation, general economic situation, and appetite for major purchases. However, the balance is still weak by historical standards and masks the impact of real income squeeze across different income groups. The lower-income group has been affected particularly badly by the cost of living crisis, as it spends a larger proportion of its budget on essential items which have gone up in price, including food, electricity and gas. The distributional impact of high inflation matters for our relatively weak consumption forecast, as spending by the lower-income households

is more sensitive to changes in real income. We expect real household consumption growth to average 0.2% in 2023 and 0.6% in 2024.

According to the BRC-KPMG monthly Retail Sales Monitor for June 2023 overall UK retail sales grow by 4.9% in value although we continue to see a continued divide of food vs non-food retail sales (although apparel sales remain relatively resilient). Food sales are growing by 10-12% with non-food largely flat. On the face of it, food sales look strong although these numbers need to be put in the context of ongoing double-digit food price inflation.

Looking ahead to the next 12 months we expect trading conditions for the retail sector to remain challenging. Overall retail sales (excluding inflation) are likely to grow by 1-2% in 2023 (KPMG analysis) although this will be heavily skewed in favour of essential categories like grocery. In that context it is important to highlight though that we are seeing winning operators across all retail categories even in those categories that are facing limited growth prospects.

As outlined in our PoV “Retail’s delicate balance” (Retail’s delicate balance) we believe that focussing on the 3P’s (People, Planet and Profit) should be retail Leaders priority over the next 12-18 months and understanding how to convert what seem like tensions into harmony.


Nick Bubb, Retailing Consultant, Bubb Retail Consultancy Ltd

Stockmarkets look forwards rather than back, but six months is about the limit to how far investors can discount the future course of events and looking 12-18 months ahead is a big ask…

Even looking ahead by 6 months isn’t easy, as illustrated by what is happened this year so far. Back in January, for example, there was a strong consensus that, afer a tough first half, the second half of 2023 would see a useful recovery in consumer spending, as inflation came down. But now, afer a surprisingly resilient first half, the worry is that the much-feared recession will at last materialize in the second half, as interest/mortgage rates head much higher than originally expected, as the Bank of England tries to get a grip on inflation.

So, what are current stockmarket share prices telling us? Well, against this background, both the retailing sectors have outperformed the overall stockmarket pretty well so far this year, notwithstanding the “cost of living” crisis, reflecting a stronger than expected profit outlook for the main players; as of July 7th the Food Retail sector was running up by about 10% cumulatively and the General Retail sector was up by about 12%, whereas the All-Share index was running 3% down.

But in the case of the General Retail sector, performance has faltered of late, afer a strong start to the year, as nagging doubts creep in about the impact of the surge in interest rates. And the outperformance of the sector has been quite concentrated in two businesses which have a firm foothold in the Food Retail camp as well, namely Marks & Spencer (whose shares are well over 50% up) and B&M (which is over 30% up). That said, even Kingfisher, which is clearly heavily exposed to worries about “big ticket” spending, is only running 5% down (implying that investors are not yet too worried about the outlook for DIY retailing), whilst the Next share price is running a decent 15% up (after reporting a surprisingly strong start to its Q2 trading).

As for the Food Retail sector, Ocado has been under pressure, given the fallback in the Online Grocery market, with its shares running slightly down so far this year. But Sainsbury has done well, with its share price nearly 25% up (perhaps reflecting its greater Non-Food exposure, via Argos), whilst even Tesco is up 10% in the year to date, despite the recent accusations of “profiteering”.

To sum up the current retailing picture: sales growth for the big Food Retailers has been stronger than one might expected, given the punitive impact of the surge in food price inflation and sales for the Non-Food retailers has not been as bad as expected, given the cost-of-living crisis. Consumers seem confident that energy prices will come down and that the jobs market will stay buoyant, given the widespread staff shortages, with private sector workers able to secure useful pay rises. And many consumers have been prepared to run down their savings, if need be, to help enjoy the summer weather. And mortgage holders have been protected thus far from the surge to 5% interest rates by the availability of fixed-rate deals.

But the current relatively benign position is about to change, with the Bank of England likely to push interest rates up even higher and that is starting to feed through into mortgage rate deals and into a dip in the housing market. “Big ticket “ retailers will therefore come under increasing pressure in the second half of this year.

Looking into 2024, the political cycle becomes just as important as the economic cycle, with an Election expected next autumn. Hopes that there would be room for “pre-election” tax cuts have been dashed, but it may yet be that the Government backs away from any further confrontation with the public sector workers asking for better pay. But the nightmare scenario for the Bank of England is an inflationary spiral caused by pay rises chasing higher prices, which suggest that interest rates will go higher and stay higher than expected to try to control inflation.

After a resilient performance in the last 6 months, the likelihood is therefore that retailers will have a much tougher time over the next 12 -18 months, although “multi-channel” businesses should still be able to outperform their Online peers, as consumers continue to warm to shopping in stores again, post-pandemic


Maureen Hinton, Retail Consultant

While there are signs that price inflation will slow down later in 2023, (hovering around 6%), for consumers it will make little difference to their spending power as income growth is lagging. The poorest have been hit the hardest so far, but the rise in the bank interest rates will put pressure on home owners renewing their mortgage deals, thus spreading the pain into new income groups. Furthermore, the spending in retail that was boosted by COVID savings, will lose out, as any savings are used to pay mortgages.

Under these financial pressures, consumers become more selective, prioritising essentials and delaying spending on big ticket and discretionary items. This is always an advantage to food retailers as food is an essential, and frequent, purchase, and when consumers cut back on eating out of the home, it is supermarkets that benefit. In the modern world, health & beauty, like food, is considered an essential and will also be resilient.

On the other hand, electrical and home related sectors, which did well out of COVID lockdowns, when consumers spent more on their home work spaces and equipment, will suffer. Future sales will rely on product innovation, and replacement at the end of a life cycle.

Clothing retailers with strong brands and desirable product ranges have benefitted from pent up demand since COVID. Event led buying, such as holidays and occasions, have boosted sales, but this trend will begin to slow down. Retailers with a strong proposition, such as Zara, will be those that benefit from any spending.

Offering value will be a priority, particularly in food, which will help to drive down inflation – especially as the discounters continue to expand. But of course, this hits profits because employment costs remain high in a tight labour market, and prices in the supply chain, and operating costs are not dropping fast enough to compensate.

Therefore, as ever, it will be those retailers with strong cash reserves and a compelling proposition who will survive, while those paying down insurmountable debt levels will struggle.


Mike Watkins, Head of Retailer and Business Insight UK – NIQ

The impact of the highest inflation in decades is leading to another hiatus in shopping behaviour in food retailing and one which has the potential to be longer lasting than the disruption caused by 2 years of a global pandemic. Consumers are paying more to buy less – volumes at the big supermarkets have been negative for over 16 months – and households are returning to shopping for groceries `little and more often ‘ with big trolley shops and online now seeing the most cost saving pressure.

The NIQ Homescan Survey Attitudes to Retailers released in July 2023 also reveals that inflation is having a significant impact on sentiment with Price replacing Shopping Experience as the most important factor for shoppers when deciding where to do their grocery shopping. Aldi and Lidl are gaining more shoppers and collectively have a higher share of wallet than in 2022, and now hold 20% market share in the UK for the first time.

With over half of UK households saying they are severely or moderately impacted by the cost of living and 90% of all households making savings on their grocery bills (NIQ Homescan) this is no surprise as its fuelled by the significant fall in disposable income. However, this may well lead to a more permanent change in consumer spend as lifestyle needs and the quest for lower prices begin to replace location and loyalty as the drivers of store choice.

At NIQ we are predicting food inflation will come down to between 6-9% by the end of the year and around 5% in 2024. Even if it is at the lower end of that projection, it will mean that consumers are still paying more for food and drink than they did 2 years ago. This impact should not be underestimated and a further shift of spend back to food retail and away from hospitality is also quite feasible as households see the value of eating at home to help manage budgets.

Private Label growth is surging in 2023 with volumes up as branded volumes fall with unit share at an all-time high of 64% of all fmcg sales and a value share of 55% (NIQ Homescan Q1 2023). This share is unlikely to fall back as Private Label has grown share structurally in nine out of the last 10 years with the cost-of-living crisis simply giving a further boost to growth.

NIQ have also looked at shopper missions – how the consumer shopped and what their intention was – and we now see that over half of all grocery spend going through stores is now from smaller missions. For example, the weekly grocery top up, fresh foods for meal preparation for the next 3 days, dinner for tonight, or the treat for today.

Price has become the new differentiator and shoppers will become even more smarter about the way they shop – looking for price promotions, comparing prices, being more reliant on a shopping list (or previous basket if shopping online) and shopping around. Becoming more calculated and more aware of what they are getting for their money than we have seen in the previous decade.

Looking ahead for the next 18 months , NIQ are expecting a reset of both sentiment and behaviour as the result of the `higher and for longer` food and drink prices and the rise and rise again of the savvy and disloyal consumer. This will be inflation – the next chapter- with retailers who focus on the lowest and consistently low prices, being the winners.


James Sawley, Head of Retail & Leisure – HSBC UK

As a leading lender to the UK Retail sector we’ve been concerned about consumer demand for some time now. To  date, we have been surprised by the resilience of consumer spending underpinned by the labour market, wages,  savings, and improved household balance sheets post-COVID. However, following several disappointing CPI prints it  now looks like we are in for a long slog of high and sticky inflation and interest rates. Interest rates have ‘only’  increased to their multi-decade median, but the speed and unexpectedness will take consumers by surprise, denting consumers ability, and willingness, to spend. 40% of households have a mortgage while a further 20% rent from private landlords. It is positive that 90% of mortgages are fixed for an average of c3 years however the magnitude of the increase means consumers are likely to change their spending habits even in anticipation of a future re-mortgaging event. A consumer earning a £40k salary with a £250k mortgage might have had a 7% pay rise, however, this is only going to net £140 a month compared with +£400 in mortgage costs, and +£50 for groceries. Significant changes are going to be required to lifestyles, and while much will be absorbed in ‘big ticket’ savings such as cars and holidays, one has to assume consumers will cut back on discretionary purchases and will trade down. This will accelerate the structural shift to discounters as they continue to make gains at the expense of retailers who are neither at the sharp end of value, nor offer consumers an experience, or a service or point of difference that customers are prepared to pay for. We have observed clear signs of a softening in consumer demand in the last few months as the ‘mortgage crisis’ narrative has intensified. To make matters worse, interest rates have a double-whammy impact on the sector.  While 90% of consumers might be fixed, some 90% of companies are NOT fixed, leaving retailers immediately exposed to higher debt costs, compounded by the increased cost of labour and energy. So, with pressure on the top line, and the bottom line, do I predict a wave of high profile insolvencies and forced sales processes? I don’t. Since I was made  Head of Retail 8 years ago the sector has seen nothing but turmoil. Brexit, the devaluation of Sterling, two recessions,  COVID and a war in Europe have all made the trading environment extremely tough, and that’s on top of increased online competition. We have seen a rise in small business insolvencies, but for mid to large companies, if you have survived the last 8 years, your business must be well run, relevant, and your profit margin and balance sheet should have wiggle room for what’s hoped to be short term cyclical challenges. Retailers, as a general rule of thumb, are not heavily indebted. Bankers like me don’t like putting financial leverage on top of already highly operationally geared companies. In addition, there are a few tailwinds for retailers this year, the biggest being the collapse of freight rates,  cash generation from stock liquidation, and the recent improvement in Sterling. I do think we will see a small number of mid-market retailers struggle and end up in some form of process, but these names won’t come as a surprise to anyone. For the rest of the sector, it’s all about battening down the hatches (cost-wise), staying true to your brand  and the products your customers love, take price where you can without gouging, and waiting for inflation to subside.


Jonathan De Mello, Founder & CEO –  JDM Retail Ltd

The prognosis for retail and leisure over the next 12-18 months will undoubtedly be tough, as interest rates continue to rise and recession looms. According to RPC, retail and leisure insolvencies are up 56% in the past year, and this trend is likely to continue. Whilst the larger retailers are generally trading at sustainable levels, the majority of these insolvencies will be independent retailers, who have seen the twin impact of falling demand for local high streets in  light of hybrid working patterns, and higher business rates. The larger retailers are not totally exempt from distress however given ever rising costs – with Boots and Argos planning to close hundreds of stores over the course of the rest of 2023, a potential Wilko CVA, and the administration or restructuring of mainly F&B/Leisure operators including  Le Pain Quotidien, Prezzo, Dirty Bones, Cineworld and Empire Cinemas. In fact, 4,593 hospitality venues were closed in the year to March according to NIQ and AlixPartners – consistent with recent Barclaycard data which highlights increased substitution of eating out with eating at home, with restaurant spend down and takeaway spend up.

The cinema sector has been impacted considerably, with box office sales still down significantly vs 2019 indicating long-term structural upheaval. Though growth in the various streaming platforms during and post-COVID has abated,  cinema visits have not fully recovered. We are seeing significant polarisation in the sector, with price-sensitive consumers gravitating to either their cheapest local cinema, or saving up for a premium offer such as Everyman.  Cineworld and Empire may not be the only casualties in the sector as we move into 2024, and the reason this is pertinent is the sheer size of cinemas and the gap they leave on the high street when they close – akin to department stores. Creative use of such space is key, and there are leisure operators willing to take such spaces for large competitive socialising venues – though not all cinemas will be suitable for such conversion.

The food sector has been hit by ‘Greedflation’ claims, and such allegations will likely only get worse as we move toward recession. Food inflation is at historically high levels across other European markets too. In France for example, the government has been closely involved in attempting to manage food price inflation, with retailers taking a hit to margins on ‘essential’ food items. Similar government intervention in the UK could damage margins in an already  highly competitive sector, and this could mean less investment in new stores for the likes of Morrisons and Asda in particular. Whilst there seems to be little/no veracity in these ‘greedflation’ allegations given flat margins overall for  UK grocers, the cost of food is an emotive topic for consumers (i.e. potential voters) and politically motivated government intervention a la France is sadly likely therefore.


Miya Knights, Retail Technology Magazine Publisher and Consultant

Considering where we are now, after the Bank of England (BoE) +50 points base (bps) rate increase on 22 June (when most were expecting +25bps), Q2 2023 retail sales were actually a lot more stable than they might’ve been.

But, given the BoE is expected to go further with rates, given a desire to avoid a wage price spiral (and to avoid earnings growth of c.6% becoming embedded in the market), the outlook over the next 12-18 months is still relatively negative.

We must also consider the fact that UK households withdrew a record amount of savings in May, which means discretionary spending will be under even more pressure going forward.

Therefore, retailers will have to double down on promotional activity to shore up and improve their offer. But they must take care to do so while safeguarding EBITDA, which will be an extremely tall order, in low-value, high-volume sectors such as grocery, particularly.

Their desire to win on price or promotion will only be matched by those retailers who successfully make their customers feel that they recognise and reward them for their continued custom, irrespective of the channel in which they choose to shop.

So, expect to see more loyalty and preferential pricing activity, if not only to drive sales, but to also increase the amount of first-party data they can use to generate additional revenue from the growing interest in retail media networks and marketplaces.


Natalie Berg, Retail Analyst and Founder – NBK Retail

‘Doing more with less’ will be a key theme over the next 12-18 months.

With persistently high food inflation, budget-conscious shoppers have grown accustomed to making their pounds stretch further – flocking to the discounters, ditching online grocery, switching to private label and utilising loyalty  cards for extra savings.

Just as the pandemic drove new shopping habits, some of the behaviours learned during the cost-of-living crisis will stick. For example, with private label penetration having surpassed the 50% mark last year, it’s clear that shoppers are discovering that supermarkets’ own brands aren’t just cheaper but sometimes better quality too.

Some good news – we are likely past the peak of inflation. Tesco CEO Ken Murphy said recently that he is “hopeful”  that prices will moderate for the remainder of 2023. This will benefit all customers given the non-discretionary nature of the category, but particularly those lower-income shoppers who spend a larger percentage of their household income on essentials like groceries.

With very public accusations of greedflation – and perhaps the more pressing need to stop the discounters from stealing share – supermarkets will be keen to translate lower commodity prices into lower shelf prices as soon as it’s viable to do so.

The easing of food inflation will be welcome news, but all is not rosy. Rising interest rates will be a blow to the millions of mortgage holders across the UK. In fact, in June 2023, the Institute for Fiscal Studies (IFS) warned that more than a  million households are expected to lose at least one-fifth of their disposable income due to mortgage costs hitting their highest levels since 2008.

This was initially a K-shaped crisis: until recently, the middle classes have been largely resilient despite inflationary pressures. A strong labour market and pent-up pandemic savings have helped many to weather the storm, but this resilience will be tested as rising mortgage costs eat into disposable incomes. Therefore, as we look ahead to 2024/25,  retailers must brace for more turbulence as the impact of this squeeze on purchasing power ripples through the sector.

We are likely to see a further reining in of discretionary, big-ticket items (ie. electricals, home appliances and furniture). The post-pandemic desire for experiences, however, shows no sign of abating. Even as budgets become further strained, consumers are likely to maintain spending on hospitality, travel and leisure – and likely at the expense of physical goods.

Retailers too will have to do more with less. The cost of doing business is considerably greater and far more volatile  than it used to be which, combined with subdued consumer demand, is dangerous territory. Many retailers feel like  they are in a permacrisis. Operating in firefighting mode may be essential to get by in the near term, but it’s important  not to lose sight of the customer and their continuously evolving needs.

Retailers must clearly identify who they’re targeting and what their brand stands for. For example, you can compete on value or you can compete on convenience – but you can’t do both. Just look at Aldi quietly curtailing click & collect from some of its stores. It’s a non-essential service that adds cost into a business model that is founded on simplicity and operational efficiencies. As former B&M boss Simon Arora, recently told me: “You’ve got to know what you’re  good at and execute bloody well.”

That is sound advice for any retailer, and especially relevant in the current climate. Looking ahead, artificial intelligence will continue to advance at mind-boggling speed, enabling retailers to operate far more efficiently while simultaneously offering more personalised and engaging customer experiences. Given current cost pressures, retailers may delay dipping their toes into the metaverse in the near term, but it’s important not to lose sight of the big picture  – immersive digital experiences are the next big thing in retail. It would make sense for retailers to spend the next 6- 12 months focusing on quick wins like augmented reality and liveshopping. The convergence of physical and digital retail will certainly continue to accelerate, though I’d argue that we’ll see a natural deceleration in the pace of change.  The pandemic was a once-in-a-lifetime catalyst for digital transformation, but we have now settled into yet another  normal and retailers must ensure investment in the right technology that meets shoppers’ hybrid needs. Shoppers want more than just fast and frictionless.

Finally, retailers must ensure the ESG agenda isn’t put to the back burner as inflationary pressures bite. The industry is making significant progress in sustainability, diversity and social justice efforts, and it’s essential that retailers continue to live up to their brand values.

Gary Whittemore, Head of Sales, EMEA & APAC – RetailNext

Recent trends in UK inflation have raised concerns about the sector’s performance for the next 12 to 18 months.  Despite the adverse effects of inflation, the sector’s resilience, adaptability, and potential mitigating factors offer hope for the future. Reassuringly, the BRC’s assessment looks optimistic with spending in June rising at an annual rate of  4.9%, a stronger reading than the average of 4.6% in the three months to June and above the 12-month average of  4%.

For retailers rising costs of raw materials, higher import prices due to a weakened pound, and geopolitical factors,  such as Brexit-related uncertainties are all contributing to on-going pressure on the sector. As a result, the sector faces continued challenges when it comes to managing costs, maintaining profitability, and thriving in an increasingly competitive market.

Sustained inflation has significantly increased costs for retailers, ranging from sourcing materials and products through to transportation and storage. With consumers being price-sensitive, retailers face a challenging conundrum – passing on these increased costs to the customer through higher prices may lead to a decline in demand. Alternatively,  absorbing these costs will squeeze profit margins and financial stability for some.

For consumers increases in core inflation will impact spending power given the erosion to the real value of wages with salary increases struggling to keep pace with inflation, as well as pressure on reducing savings accumulated during the  Covid years all leading to an inevitable reduction in disposable income.

Higher costs of essential goods and services is forcing consumers to reallocate their budgets, affecting their propensity to spend on non-essential items. Interestingly though, luxury retail remains bullish with sales projected by Bain &  Company to grow by between 3% and 8% this year. While this market remains inaccessible to most consumers, day to-day retailers could learn from the luxury sector’s strategies like ‘premiumisation’, offering innovative, imaginative  (and potentially inexpensive) in-store experiences and great customer service.

To overcome the challenges posed by inflation over the coming months, the retail sector must adapt and innovate to cater to evolving consumer preferences. Businesses that can effectively leverage technology and embrace omnichannel experience are better positioned to thrive. Retailers should also be exploring collaborations and partnerships to achieve economies of scale and offer competitive pricing. By focusing on customer experience retailers can differentiate themselves and mitigate the impact of inflation on their businesses with customer loyalty becoming a crucial factor. Retailers will need to ensure ever-stronger customer relationships through personalisation, excellent customer service and value-added services, such as reward programs.

The government’s fiscal policies and monetary interventions are likely to influence consumer sentiment and spending behaviours. By implementing measures to curb inflation and boost economic growth, such as interest rate adjustments, targeted subsidies, and tax incentives, policymakers can provide relief to consumers and retailers alike.  Collaborative efforts between the public and private sectors, along with clear communication, are essential to restoring consumer confidence and supporting the retail sector.

Finally, consumer confidence is a critical growth driver. As the economy recovers from the effects of the pandemic and inflation stabilizes, consumer sentiment is likely to improve in step. Retailers that focus on offering value for money and adapting to changing consumer demands are likely to thrive.