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Retail Think Tank

Pricing and promotion optimisation in an inflationary driven downturn could be the only lever of growth for the sector in the foreseeable future

    • Pricing and promotion management has lagged behind other areas of retail strategy.
    • Holding or reducing pricing in response to rising inflation may damage margins, although increasing prices may lead to a loss of market share and may also negatively impact brand reputation.
    • However, growth is possible if retailers use their data to understand their customers and deliver personalised experiences.

Retailers may feel that they have little choice but to slash their prices to hold onto customers as the cost of living crisis continues to hit household budgets. However, with their own inflationary pressures to contend with, this approach will only damage their margins and could even do long-term harm to their brand’s reputation.

The ongoing cost of living crisis sent consumer confidence plunging to a record low in September. While the Government’s freezing of the energy price cap at £2,500 is expected to curb inflation in the near term, household bills remain high and the early end to the utility price freeze means that from April 2023, inflation will once again be at the mercy of swings in wholesale gas prices. The rise in mortgage rates has left homeowners nearing the end of their fixed-rate mortgage deals facing sharp increases in their monthly repayments. This has increased the risk of mortgage arrears and repossessions and will cause a big reduction in households’ disposable income.

All of this will make for a challenging trading environment in the run-up to Christmas – where staying afloat, let alone achieving growth, will feel like an uphill struggle for some retailers. Profit growth in the current market might feel impossible for many retailers in Q4, especially those in the non-essential sector. Maureen Hinton, Group Retail Research Director, GlobalData Plc, comments: “Demand is under huge pressure because of rising household expenses and falling consumer confidence and this is hitting discretionary spend the hardest. The priority is essentials, and the biggest priority is food as we all must eat. Non-food, on the other hand, is the most vulnerable to falling demand.”

At the latest quarterly meeting of the KPMG/Ipsos Retail Think Tank (RTT), members discussed why a data-driven approach to pricing and promotion was even more important in the current climate, and looked at the steps retailers could take.

But rather than engaging in a race to the bottom on pricing, members agreed that an intelligent pricing and promotion strategy could help retailers to both protect their margins and build longer lasting relationships with their customers.

At the last quarterly meeting, they looked at the importance of using customer data to understand demand and deliver personalised experiences with relevant offers, deals and incentives.

A challenging economic outlook

RTT members highlighted the challenging trading conditions retailers are operating in currently due to high inflation and interest rate hikes.

Ruth Gregory, Senior UK Economist, Capital Economics, comments: “With inflation set to rise to a peak of 10.8% in April and to remain elevated in 2023, inflation will weigh heavily on households’ real incomes in 2023 by a huge 9 percentage points (ppts). Some of the pain for households from rising inflation will be dampened by the Government’s energy price support and by wages rising further. But households’ real incomes still look set to fall by a large 1.5% in 2022 and 2.5% in 2023. The latter would be the largest annual fall since records began in 1955.”

Despite the bleak economic outlook, the RTT believes that growth is possible as the world returns to normal after two-and-a-half years of Covid-related disruption. During this time, the retail winners and losers were primarily split between the essential and non-essential categories – now the victors within each category are starting to emerge once again.

In this climate, pricing and promotions management is now one of the most important, and historically overlooked, levers for growth. Indeed, KPMG analysis estimates there’s around $200billion left on the table globally from a lack of pricing and promotions management.

Pricing and promotion strategy – still in the dark ages?

The RTT notes that pricing and promotion has undergone the ‘least transformation’ compared to other areas of the business, with decisions driven too much by supplier, not consumer, demand and without clear customer insights.

Paul Martin, UK Head of Retail – KPMG, says: “What’s astonishing is that many retailers often don’t have a senior person with cross-functional responsibility solely in charge of pricing and promotion strategy, it’s often done on gut feeling. They have targets with suppliers but they aren’t always retrospectively reviewed, nor are suppliers penalised or rewarded for delivering against a performance target. Compared to real estate, finance, HR and store operations, buying and merchandising feels like it’s operated the same way for a thousand years. Price and promotional management is an immature discipline – yet there are sophisticated solutions out there that would help retailers understand who they’re interacting with and become more scientific with pricing and promotions.”

His views are shared by Ruth Gregory, who adds: “Involving pricing intelligence to tailor increases according to price sensitivities will also be crucial to building a more targeted approach to customers.”

Is growth possible?

Nick Bubb, Retailing Consultant, Bubb Retail Consultancy Ltd, notes that “An inflationary driven business environment need not be unhelpful to growth in retailing profits, if gross margins can be maintained by fully passing higher product supply costs on to the consumer and if sales grow at least in line with the rise in operating costs. The problem the UK sector faces is that it is hard to fully pass on higher prices when the consumer is under such pressure from the surge in energy costs and the cost of living, whilst sales volume declines are eating into the top-line benefit of higher inflation, as the hard-pressed consumer seeks to make cutbacksThis was evident even before the financial turmoil unleashed by the disastrous mini-Budget on September 23rd as both retail sectors were already underperforming badly. They are both now running about 40% down in 2022 to date.”

However, members believe that growth is possible if retailers adapt their existing models in order to protect themselves from inflation and customers from price increases. They agreed that retailers should put a focus on growth in profitability, not revenue.

James Sawley, Head of Retail & Leisure, HSBC UK, agrees that the economic conditions are difficult – yet he believes the most agile retailers can still achieve growth: “High labour and fulfilment costs, and a drop in the value of sterling, have created strong headwinds for non-food retail, particularly online. In this climate, many retailers may have to shrink to survive by rationalising their product range and only buying products that are true to their brand, reducing the need to discount, and aligning cost base accordingly. If they take a longer-term view, and hedge their currency risk, they could gain an advantage by protecting customers from market volatility; become smarter about buying, design and pricing more scientifically.”

Despite this, lower business rates could provide a much-needed boost for retailers, offering greater flexibility in the future for pricing and promotion strategies. Jonathan De Mello, Founder & CEO, JDM Retail Ltd, says: “Business rates have spiralled out of control over the past five years since the last revaluation and, at this point, are completely out of kilter with rents. The forthcoming 2021 revaluation will correct this and will certainly be welcomed by retailers. Whereas costs such as staffing, utilities and service charge have all risen considerably this year – and will rise further in 2023 – rates are linked to rents, which have fallen by around 30% for retail premises across the UK between 2019 and 2021. Due to the government’s desire for ‘downward transition,’ retailers won’t see the benefit of these rates reductions immediately, but this reduction over the course of the next three years will go some way towards counteracting higher costs across the rest of the store P&L.”

Playing the long game

While pricing and promotion has traditionally focused on short-term tactics, such as ‘buy-one-get-one free’, in the current environment the RTT believes that a long-term vision is needed, and simply lowering pricing is damaging to both margins and brand reputation.

Martin Newman, The Consumer Champion, says: “The German discounters are value players, it’s part of their value proposition and they’re the natural place to go for people wanting low prices. However, if that hasn’t been your brand promise for the past five or 10 years, simply switching to a value-based proposition unlikely to have the desired impact and continued low pricing could be far more damaging in the long run. A relentless focus on building customer lifetime value (CLV) will help retailers to be more strategic in meeting customers’ needs – for example, offering a discount in exchange for bringing in old electricals and fashion to be recycled. This could help position the brand as a leader in conscious consumption, building a reputation that lasts beyond the immediate cost of living crisis.”

Members also agree that the FMCG sector needs to move onto a more long-term approach towards pricing and promotions, driven by longer-term trends in consumer demand, not by supply-side availability.

Mike Watkins, Head of Retailer and Business Insight UK – NielsenIQ, says: “Delivering a demand-driven, long-term approach to pricing is dependent on a better understanding of the consumer. Brands and retailers that can find the balance between price increases and effective promotions to create the most efficient pricing strategy will benefit. A focus on everyday low prices and fewer short-term promotions will be how retailers generate growth where FMCG volumes are falling and shoppers are putting fewer items in their shopping baskets.”

Members also point out that the German discounters are leading the way in creating CLV, despite being known for their low-pricing. Martin Hayward, Founder – Hayward Strategy and Futures, adds: “One new loyalty scheme is now outplaying some of the more established programmes. What they’ve done is come up with an ‘accelerometer’ where the rewards get bigger the longer people stay with them. This highlights the challenges for retailers to align price and promotion strategies with their brand values, helping them to develop long-term relationships when it can be easy to slip into short-term mindsets. This reward programme is a great example of how to lock in customer loyalty while protecting brand values, in contrast to many schemes which offer the same small rewards regardless of how much customers spend.”

A data-driven approach to pricing and promotion

Pricing and promotion will only be a vehicle for growth if retailers are able to use their data effectively to deliver personalised customer experiences – including deals and offers relevant to them. This will not only drive sales at this crucial time, but also help to build lasting loyalty.

Members point out that retailers need to understand how consumers’ needs and priorities are changing due to the cost of living crisis, and adapt their offer accordingly. Joe Marshall, Head of Customer Experience and Channel Performance, Ipsos, says: “Our data shows that an increasing proportion of customers view price as being more important than ESG issues due to the rising cost of living. The economic picture is changing so quickly at the moment, so retailers need as much insight into the latest data and consumer requirements in order to make intelligent and informed decisions on pricing.”

Retailers need to continue to invest in connected IT systems in order to capture and make sense of their data and break down silos between departments. This will allow them to drill down into the detail of what consumers really want, so they can determine the tipping point on pricing and identify customer segments where convenience, rather than cost, is the big motivator.

Paul Martin says: “If a family has a food budget of £30 per week, it’s all about value because any rise – even a jump of 4p in the price of pasta, for example – may mean they switch to a discounter. A more affluent customer, on the other hand, might be more concerned about convenience and getting the right products than price. If some of those products aren’t available when they place an online order, it’s an opportunity to direct them towards alternatives, such as their nearest store.”

Members agree that the person responsible for pricing and promotion strategy should have analytics in their background so they can build a team and develop systems capable of delivering real insights.


As the sector heads towards Christmas, the challenges for retailers are clear. The Retail Health Index (RHI) forecasts a drop in performance – the biggest golden quarter decline since 2011 – as consumers feel the impact of higher energy bills more acutely and interest rates continue to rise. There are signs of hope though, with the World Cup expected to boost food sales.

What’s certain is that retailers need to move away from short-term thinking, where the only solution is to cut prices to impossible levels. Instead, they need to understand their customers and serve them in a way that’s relevant to their lives. To optimise their pricing and promotion strategies, and increase CLV, retailers should use readily-available technology to break down data silos and derive meaningful insights.

What this strategy looks like will depend on what the data tells them, and it will be different for every retailer. Some might refine their loyalty programmes, rationalise their product range, roll out sustainability initiatives, or focus on keeping prices low.

The RTT believes that pricing and promotion has undergone ‘the least transformation’ compared to other areas of the business. But done right, it’s also a real opportunity for retailers to become leaders in the field and unlock their share of the potential $200billion available to them.

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

Paul Martin, UK Head of Retail – KPMG

Pricing and promotions strategy has arguably always been more art than science. Given the number of variables, dependencies and motivations at play, this is not surprising: it’s truly a complex area to get right.

In normal times, industry leaders might be content to keep this topic on their radar as an area for ‘continuous improvement’. But these are not normal times. The Covid pandemic changed many behaviours and preferences, and the cost-of-living crisis is likely to tip many economies into recession. Energy bills are reaching dizzying heights, becoming almost like a second mortgage or rent payment. Consumers will rein in their spending, many of them drastically, placing an even greater weight on price and searching ever harder for discounts and deals.

Running in parallel to this – and fuelling it – is inflation. The post-Covid explosion of pent-up demand mixed in with supply chain disruption has driven inflation higher, accelerated by the rise in energy costs as a result of the war in Ukraine and sanctions on Russian energy exports. As of August 2022, inflation stood at just over 10%, but the Bank of England has warned it is likely to peak at 13% later this year – and some analysts have begun to predict it could even reach 18% in 2023. These are levels that we haven’t seen in the last 40 years and most CEOs and management teams working today will never have operated under such unpredictable conditions.

$200bn on the table

Given this outlook, getting your pricing and promotions strategy right has never been more important. In times of stable prices, businesses can ‘manage’ more or less on instinct, accepting a certain amount of chance over what works and what doesn’t.

This is not a fringe issue. We calculate that, globally across suppliers and retailers, pricing and promotions inefficiency is worth a staggering $200bn annually. That is a vast amount of money, a lot of which is currently being inefficiently allocated or, at worst, simply wasted. Management teams literally can’t afford to leave it on the table.

Your substitute for growth

With recessionary challenges ahead, many businesses will be looking to control their cost bases as an urgent priority, and rightly so. But cost reduction can only take you so far and it takes time to take effect. Analysts and investors will still be looking for, and rewarding, growth. A better and smarter approach to pricing and promotions could unlock a sales and margin uplift that will substitute for growth in the short-term. Several percentage points is not out of the question.

To achieve this, both suppliers and retailers will need to take a much more rigorous and dynamic approach. The old model of an annual ‘top to top’ senior meeting between the supplier and retailer to agree a yearly plan simply isn’t fit for this environment.

Grasp the opportunity

We’ve been here before, most recently in the financial crisis a decade ago, when a steep slide in demand pushed pricing and promotions to the top of everyone’s agenda. So why are suppliers and retailers not at the top of their game now? We see five key challenges:

Insights: There is a distinct lack of data and insight into how shoppers respond to prices and promotions and, crucially, what the return on the promotional ‘investment’ is. Mini spreadsheet industries have been created to try to collate, report and analyse promotions but in practice there is no ‘single version of the truth’ in terms of data and insight, which drives poor decisions in turn.

Effectiveness: This lack of data and insight impacts directly on the effectiveness of campaigns. Too often the default is to run the same promotion mechanisms (multi-buy, etc.) or make the same investments in shelf displays over time without knowing if they really work.

Incentives: Retailers benefit from promotions if they attract more shoppers and bigger baskets, but consumer goods suppliers need to balance the trade-off between volume, price and margins. Very few, if any, promotions (funded by the supplier’s margin) are conditional on performance by the retailer and even when they are, they are rarely managed or acted upon if under-performing. The problem is that, with no conditionality, promotions simply become price cuts and the supplier bears the risk while the retailer has relatively little ‘skin in the game’.

Governance: Who is responsible and accountable for pricing and promotion? There are multiple roles that have responsibility for specific parts. But all too often, no one owns and looks across the whole value chain (let alone across retailers AND suppliers) and decisions become an internal, and time-consuming, negotiation.

Proliferation: Over the last decade there has been an increase in the frequency of promotions but they are often also customised for each retailer. This has a potential ‘double negative‘: it becomes difficult to manage both administratively and operationally, while shoppers come to expect certain offers and are increasingly reluctant to buy the product at anywhere near full price.

Take action today

Pricing and promotions have become a core strategic issue that could almost literally make or break organisations during the testing months and years ahead.

There is no ‘silver bullet’ and every business is in its own unique position in terms of challenges and opportunities. However, the option to ‘keep calm and carry on’ should be taken off the table. Every aspect of pricing and promotions should be questioned – in effect, a zero-basing approach – and there is no time to waste.

We don’t pretend to have all the answers – but have seen the difference that can be created in organisations that give pricing and promotions the strategic focus it needs.

Here is a ‘lucky seven’ of our thoughts as you start to think about how want to play your chips:

      • Pricing and promotions is a fundamental capability and needs to be addressed right now. In difficult times, this can be your substitute for growth
      • It needs C-Suite attention, potentially even led by the CEO
      • It must be cross-functional and systematic across the organisation, not just investment in selected areas
      • The time may have come to take a zero-basing approach – looking at the whole area afresh, with every pound of investment and every tactic challenged and justified
      • Identify your critical metrics to measure pricing and promotion effectiveness. It may be just 2-3 simple indicators but they should motivate learning-as-you go
      • Encourage innovation. Don’t just do what you’ve always done. Incentivise teams to be creative, bold and experimental
      • Stay the course and keep your focus on pricing and promotions. If your organisation wants to move on to the next big thing, someone has to hold their nerve.


Nick Bubb, Retailing Consultant, Bubb Retail Consultancy Ltd

An inflationary driven business environment need not be unhelpful to growth in Retailing profits, if gross margins can be maintained (ie if higher product supply costs can be fully passed on to the consumer) and if sales grow at least in line with the rise in operating costs. The problem the UK sector faces is that it is hard to fully pass on higher prices when the consumer is under such pressure from the surge in energy costs and the cost-of-living, whilst sales volume declines are eating into the top-line benefit of higher inflation, as the hard-pressed consumer seeks to make cutbacks.

This was evident even before the financial turmoil unleashed by the disastrous mini-Budget on September 23rd, but since then the General Retail sector has fallen by nearly 15% and the Food Retail sector by nearly as much, even though the stockmarket overall has only slipped a little further in the last couple of weeks. Yet both Retail sectors were already underperforming badly, with the result that they are both now running well over 40% down in 2022 to date.

Investors are worried that a weaker pound will add to the inflationary spiral and that higher interest rates/mortgage rates will spook the housing market and against that very gloomy macro-economic background it is very hard for individual retail growth stories to get much of a hearing. And at one extreme the stockmarket is brutally marking down any company with a weak balance sheet and/or exposure to the troubled Online pure-play sector.

If there is any crumb of comfort, it would be that in recent days Superdry has been able to shrug off profit pressure and get the stockmarket to appreciate its work in overhauling its product range. Similarly, Burberry has won plaudits for moving quickly to refresh its Creative team, albeit the bulk of the company’s sales these days come from China rather than the UK.

It would be nice to say, in much the same way, that investors recognise that WH Smith and JD Sports are relatively well placed because a large proportion of their business comes from the US, but this distinction has got rather lost in the wash in the last few weeks, given the extent of the turmoil in the UK financial markets.

The fact that the Food Retailers have performed nearly as badly on the stockmarket as Non-Food Retailers is interesting, as high food price inflation has not historically been bad for the sector. But we live in a different time now, with a big Grocery discount sub-sector determined to press home its price advantage over the main supermarkets, whilst the likes of Tesco and Sainsbury have big exposure to the troubled Non-Food sector.

At least mighty Tesco is not going to go bust…and it is doing its best to promote the value of its Clubcard deals, but even so its profits are falling back. And if pricing and promotional optimisation is not helping Tesco that much, then it is hard to be optimistic about the rest of the Retail sector.


Maureen Hinton, Group Retail Research Director, GlobalData Plc

Is this true – that the only lever for growth is pricing and promo optimisation?  This is largely true for the food & grocery sector, but non-food has to use other levers than price or it becomes a race to the bottom.

In retail what drives growth is demand and businesses are either fulfilling existing demand or creating new demand. But demand is under huge pressure because of rising household expenses and falling consumer confidence and this is hitting discretionary spend the hardest. The priority is essentials, and the biggest priority is food as we all must eat. Non-food on the other hand is the most vulnerable to falling demand.

Below is GlobalData’s chart showing the share of consumer spending by sector pre-pandemic (2019), this year, and the forecast for 2026. Food & grocery’s share, already the largest share of spend, will increase further because of inflation rather than volumes (the population is not set to increase dramatically, and consumers are already cutting back on basket sizes), taking spend from the discretionary categories, in particular clothing & footwear.

Sector Performance: Sector Share of Total UK Retail, 2019, 2022, 2026

All figures are percentages


Source: GlobalData September 2022 forecasts

The food & grocery sector in the UK is highly competitive and value for money, quality, and price, in that order, have been the main drivers of which retailer consumers choose to shop from. But price becomes more important during economic downturns.  Consumers have recognised that discounters offer quality as well as price, and more consumers will have access to discounters as Aldi and Lidl continue to open more stores across the UK, putting the major retailers under further pressure.

Price and promo optimisation are already strategies the major players are using to maintain customer loyalty and win new customers from rivals – the Aldi price match and Tesco’s Clubcard being the most successful. However, with consumer expenditure falling in terms of volume, survival is going to be dependent on managing margins and customer loyalty.

In other sectors, while price is important, there are other levers retailers need to use such as brand loyalty, developing relevant products and services for consumers’ changing needs, and efficiency, speed, and good customer service

Proof of the value of brand equity is the success of luxury brands. Despite increasing prices in core products, such as bags and watches, this has had no impact on prices at all – indeed the luxury brands continue to show strong sales. Though their core customer base is affluent, the product is considered a good investment because of its brand value. The same can be said about sportswear brands – they are aspirational and cutting prices and using promotions (other than the conventional marketing that inspires aspirational demand) devalues the brand image.

Therefore, while price and promotional activities will be important for non-food essentials and replacements – childrenswear and white goods for instance – to survive retailers need to focus on margin management and brand equity. Retailers need to drive profit as well as sales growth to survive and, as consumers cut back and become more selective in their spending, retailers need to ensure they are the primary destination when consumers are spending.


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

2022 will be one of the most challenging years for food retailers with FMCG volumes currently down 5% at the Grocery Multiples as shoppers reduce spend to help pay for increased energy, travel, food and mortgage costs.

Over the 10 years since we last had high inflation, the trade structure has changed significantly with the `non promoting` Discounters now capturing 18% of the market (NielsenIQ Total Till) and this has fundamentally changed shoppers’ expectations. With promotional spend still close to historic lows at 22% of value sales, NielsenIQ analytics suggest that traditional promotional levers to drive volumes such as multi buy are less effective in a high inflation environment when demand is significantly reduced.

There is some important context which helps to explain why this may be. Firstly, there is a correlation between the strength of inflation and consumer sensitivity. For example, in European countries currently with the highest inflation such as Poland, the regular price elasticities are generally decreasing which means as inflation increases shoppers are less likely to change brand purchasing and instead are more likely stop buying the category.            Secondly we are seeing categories where sales are becoming more sensitive to regular shelf price than to promoted price, such yoghurts, which further limits the impact of promotions.

So the industry is faced with a dilemma: increase prices or increase promotions. Price increases will see value growth but always lead to volume decline. Across a wide basket of categories, NielsenIQ Analytics show that a 1% price increase in price typically leads to a 1.7% fall in volumes (NielsenIQ Pricing Model/EDA benchmarks July 2021- July 2022). The drivers behind price increase vary across categories with competitors’ pricing strategies having the potential to mitigate around 40% of the volume loss but it is the innate price elasticity of a promoted sku that shapes the outcome. Whilst promotions are the biggest lever to volume growth, deep promotions e.g. BOGOF v 2 FOR £4 lead to margin erosion and cannibalise the rest of the brand and category impacting overall category profit. And this assumes shoppers have the disposable income to pay up front for these promotions.

Other useful levers to help optimise are to focus on instore display (better for driving sales than bigger price discounts), bringing NPD with higher margin, growing channels with higher margins, shrinkflation (shrink products and keep prices flat) or skimpflation (reduce the cost of a product by using cheaper ingredients), although these last two mechanics are risky as they can damage long term brand equity.

Brands and retailers need to find a balance between price rises and effective promotions and importantly, find the most efficient pricing – not promotional – strategy which NielsenIQ define as a process of constant discovery about consumer, shopper, and retailer motivations. So more long term everyday low prices and less short-term promotions are probably the most effective levers of growth for FMCG at the moment.

Source: NielsenIQ 2022 Consumer Outlook Survey, June 2022 (Grocery saving tactics represent any tactic)


James Sawley, Head of Retail & Leisure, HSBC UK

At the time of writing Cable is stabilising around the 1.12 mark. A fashion retailer I met yesterday said he gives his buyers a target to achieve a 65% Gross Profit margin on a 1.15 exchange rate. Interestingly, he said he’s having some success shifting the currency risk to the suppliers by simply demanding he pays in Sterling (a key driver of the success of this strategy is that the Suppliers own domestic currency will have also devalued against the Dollar). At these exchange rates his admits that his buyers need to either negotiate very hard, jeopardise quality (not going to happen) or simply buy products and designs they are very confident will sell, and at Full Price, the brands ‘Hero’ products if you will. He recognises this may mean going backwards Revenue wise.

Given the ongoing cost of living crisis, retailers and brands will have to focus on Hero products in order to sustain gross margins by increasing prices to offset FX and cost headwinds. Not easy when consumers have less disposal income in their pockets. As many non-food business models were fundamentally conceived on a Dollar exchange rate way higher than 1.15, companies may be required to re-engineer their business models. Products for which consumers are prepared to pay for, where there is price inelasticity of demand, desirability or that are not substitutable, need to be the focus, while cost bases will need to be reduced to reflect lower sales and a lower cash margin to cover overheads – survival is the name of the game, rather than growth. Consumers in this inflationary environment will be very discerning, either you are offering market leading value for money, or unique and desirable products, otherwise retailers will struggle in this market. Expect to see heightened M&A as we navigate these choppy waters!

Currently UK retail is overstocked, tying up liquidity which just got more expensive. Gilt yields (aka the Risk-Free Rate) set the tone for all forms of financing, from loans, to bonds to equity, it also suppresses valuations by devaluing the present value of future cash flows. The promotional dilemma for Retailers will be, do I need to clear stock over Black Friday and Christmas to generate cash to pay down expensive debt (less of an option for seasonal retailers), or can I afford to keep hold of inventory which I’ve bought at a more attractive price 3 to 4 months ago, giving me a competitive advantage into 2023? A prudent hedging and financing strategy will give retailers a material competitive advantage going into 2023, retailers who have locked in Cable at pre-Budget rates, and either have fixed interest costs, or carry low levels of debt, will be better able to protect consumers from higher prices, taking market share.


Martin Hayward, Founder – Hayward Strategy and Futures

It makes sense for consumers to be cautious.

There are some big economic headwinds facing most developed nations this year that include rising interest rates, increasing inflation and temporarily high energy costs.

Against that backdrop however, there remain some strong mitigating factors that will grease the wheels of retail to counter the media narrative that embarks on yet another round of project fear.

E.g. headline: UK house prices plummet as mortgage chaos bashes Britons

A typical property cost £293,835 in the UK in September, 0.1 percent less than the record high average price last month.: Daily Express 7 Oct 2022

Contrary to what many hear:

      • The UK continues to enjoy what is effectively full employment
      • The economy is not in recession
      • UK inflation is high, yet not higher than many countries, and is soon to peak
      • Most of the drivers of inflation are temporary and out of the UK government’s control
      • Consumers still retain a majority of the extra cash that they accumulated during the Covid lockdowns (Households have accessed an estimated £1,800 from the £8,000 squirrelled away by average households during the pandemic)
      • House prices have reached stratospheric levels relative to incomes and have to pause

Against this difficult but far from catastrophic backdrop, it is important that retailers are demonstrably sensitive to the concerns of shoppers, without talking them unnecessarily down to a level of despair that will further curtail their willingness to spend.

Therefore, price and promotion optimisation will be a crucial element of this winter’s armoury to reassure but also tempt consumers.

The greatest challenges for retailers within this price and promotion driven landscape however will be to maintain brand values in a value driven market and to keep the focus on building long-term relationships when it is so easy to slip into short-term tactical mindsets.

Reducing the consumer proposition to price alone is simply encouraging shoppers to become ever more promiscuous.

It is not easy to do this, at a time when price can trump most things, but this is where a good marketing department is crucial.

A couple of best-case examples from current food retailer activity help to make the point.

The Waitrose advertisement below makes a good attempt to remind consumers that price isn’t the only criterion for purchase. For a retailer with a strong record of responsible and sustainable sourcing, this campaign works well to deliver a price message with a reminder that cheap is not necessarily good.

This campaign from Lidl addresses one of the greatest problems with so many retailer loyalty programmes – that they reward in an ordinal way, not really encouraging long term commitment.

By scaling rewards to get bigger the longer a customer shops with them, this scheme encourages a longer-term commitment from shoppers to truly lock-in their loyalty. This is in contrast to most schemes that effectively offer the same small reward however much is spent.

These two examples should act as reminders for all retailers to protect and justify their values and price premium even in a tight market, and to put a longer-term perspective into their loyalty programs which ironically are frequently too short-term focussed.


Martin Newman, The Consumer Champion

The term ‘perfect storm’ has never been more apt to describe the current cost of living crisis.

Admittedly, I am old enough to remember the endless strikes, power cuts, interest rates hitting 17% and the winter of discontent of the 70s. And of course, we can all remember the scary moment when interest rates hit 15% in 1989.

But what we’re experiencing now is far worse.

With every day seemingly seeing another entity on strike, with no end in sight for the war in Ukraine and increasing media hype over the potential for Putin to use tactical nuclear weapons to the almost comedy-esque Government indecisiveness and highly questionable decisions on taxation leading to one of the biggest U-turns in policy making in our lifetime, we live in very uncertain times.

Add to this that we’ve seen the energy price cap rising by an average 80% on the 1st of October this year, CPI inflation forecast to peak at 14% in Q4 2022, and average mortgage payments increasing at an eyewatering rise of up to £273 more each month. Therefore, the consumer has every right to baton down the hatches. In fact, maybe hibernation is the answer to get through this winter!

Facing into this, do retailers have any choice but to reduce prices and magic up promotions that add real value to the consumer? I don’t think do. But even this will not be enough to drive growth in most categories.

Pulling price and promotion leavers is fine when there is sufficient demand. But can it stimulate demand in the face of the incredible nervousness we’re all feeling with the increasing sense of ‘what on earth will happen next?’

Understandably, consumer confidence is at a record low of -49 in September 2022 -5 points worse than -44 in August.

All of this said, I’m never one for throwing in the towel!

I advocated at the beginning of the year that retailers would need to adopt a more empathetic and understanding approach to consumer engagement both through their marketing communications, and their pricing and promotions. And look to help consumers in their hour, make that their year, of need.

This is still the case. And if retailers can do this at the same time as thinking about how they can create more loyalty with new, conscious consumption, driven initiatives such as rental models or trading in your old fashion, furniture, or electrical products against purchases of news ones, they will increase loyalty and possibly even frequency.

While this year is an annus horribilis on many levels, next year will be better. With green shoots appearing in Q1 2023 as inflation begins to fall, interest rates remain stable, and we see signs of peace in the East.


Jonathan De Mello, Founder & CEO, JDM Retail Ltd

Inflation continues to run rampant in retail – increasing costs across the value chain and eroding margin. Price rises and optimisation of promotional activity are certainly strategic levers that retailers can deploy in light of this high inflation environment, but care needs to be taken in doing so, given the potential impact on customer loyalty increased prices could have.

Given the potential for continued high inflation for years to come, it is imperative that retailers review their business models now, to ensure they continue to operate well in this new environment where the value of money diminishes faster. Cost/price management is key, but maintaining value perception to engender customer loyalty is also important. This could include acceptance of a degree of margin erosion on key products that shoppers usually look at to form an opinion about a retailer’s overall pricing level. Promotional tactics could also be deployed to soften the impact of overall price increases. These should ideally/initially be digital-first; engaging the consumer online to ensure quick measurement of promotional effectiveness.

Continued high inflation will ultimately require ongoing price increases in order to avoid a terminal degradation of margin. This is a zero sum game however when combined with reduced consumer spending power, given wage growth has not kept up with inflation, and non-discretionary costs have gone up significantly despite recent caps, including utility costs and mortgage repayments. Consequently, retailers will need to devise strategies beyond simply raising prices in order to realise any potential turnover growth in the next year or so, let alone net margin growth.

The cost of capital and borrowings given higher interest rates will need to be accounted for, for example. Only projects that generate tangible short to medium term return on investment should be considered, until interest rates start to fall again. Such projects could include a reorientation of supply and distribution networks, to route shipments through low-congestion ports and lower-cost ocean lanes, and placement of distribution centres in optimal locations that balance labour availability or costs with last-mile costs.

All aspects of retailing must ultimately be examined, including rent, outgoings and labour, and processes and systems should be simplified in order to reduce the cost base. Rethinking store operations to optimize productivity can help to counter the effects of labour cost inflation. This should involve a re-evaluation of in-store labour allocation and scheduling.

However, one positive benefit retailers will see from next year will be a material reduction in business rates – which over the past few years has accounted for an increased proportion of store property costs as rents have fallen. Given rates will be revalued at 2021 levels (vs 2017 currently) business rates will fall significantly in some areas. I have seen forecast reductions in rateable value of up to 50% in some locations, which will definitely boost ailing store profit margins. Not all of this benefit will be felt by retailers immediately however, given the ‘downward transition’ of rates mooted by the government. Though no official guidance has been given on the shape of this transition, rates reductions will be spread over a 3 year period, to mitigate impact on the Treasury – which is in a rather fragile state given the impact of COVID.


Ruth Gregory, Senior UK Economist, Capital Economics  

There is no doubt that in the coming quarters the retail sector will face tougher trading conditions against the backdrop of high inflation and rising interest rates. With inflation set to rise to a peak of 10.5% in October and to remain elevated in 2023, inflation will weigh on households’ real incomes in 2022 and 2023 by a huge 8.2 percentage points (ppts) and 6.6ppts respectively. Some of the pain for households from rising inflation will be dampened by the government’s energy price support and by wages rising further. But households’ real incomes still look set to fall by a large 1.8% in 2022 and 1.3% in 2023.

Moreover, in response to the boost to inflation from policies announced in the Chancellor’s mini-budget and the drop in sterling, interest rates look set to rise from 2.25% now to a peak of 5.00% by early 2023. To put this into context, that would leave Bank Rate 490 basis points above the low of 0.10% during the pandemic, would mean this monetary policy tightening cycle is twice as big as the previous three and mean it’s the biggest increase in interest rates since they rose by 750 basis points in 1998-90.

Sources: Refinitiv, Capital Economics

So the cost of living crisis will be exacerbated by a cost of borrowing crisis. If interest rates were to rise to a peak of 5.00% that’s consistent with households’ interest payments rising from 3.4% of their income to 6.1% in 2023. That increase is coming from a very low level and it would be smaller than the rises in the late 1990s and mid-2000s. But it will take place over 18 months rather than 3-4 years. That’s a big adjustment and explains why we are becoming increasingly worried about the housing market. Indeed, given the significant jump in mortgage rates over the past fortnight, we now think that a fall in house prices of around 12% between now and mid-2024 is likely.

Sources: Refinitiv, Capital Economics

Overall, higher inflation and higher interest rates are likely to drive a fall in economic activity by 2% in total from Q3 2022 to Q2 2023 and a 3% peak to trough fall in real consumer spending. And while this contraction in economic activity would be much smaller fall in GDP than during the pandemic (22%) and the Global Financial Crisis (6%), it would be on par with the falls in the mid-1970s and early 1990s.


Sources: Refinitiv, Capital Economics

The broadening of inflationary pressures also suggests that few retailers will fail to feel the effects of this contraction in consumer spending. As households become more sensitive to price rises and seek out cheaper products, it will be all the more important for retailers to consider their marketing strategies, vouchers and loyalty rewards, as well as the overall customer experience and personalisation of the product. Involving pricing intelligence to tailor price increases according to price sensitivities will also be crucial to building a more targeted approach to customers.