The Bad News
Beset by low to no growth in the economy, customers impacted by a cost of living crisis, a recruitment dilemma, high staff costs, political uncertainty, and a trading landscape changed permanently by the pandemic, UK retail had a tough 2023.
On top of all this, the continued impact of longer-term trends around channel fragmentation, changed consumer behaviours and decaying trust in institutions created further pressures which will spill over into 2024.
The RTT members predict that 2024 will be another lacklustre year, one of stagnation with many retailers simply getting by, particularly in the first half. And, as consumers come out of a Christmas, even with some good news at the tail end, this will see shoppers retreat into very tight budgeting from January onwards. It is expected that the UK retail sector will likely continue to see significant downward pressures on demand, cost and margin for the foreseeable future with a potential low-point being reached in May 2024.
Charles Burton, Director at Oxford Economics, said: “We think three key themes will shape the outlook next year, with the economy treading water as it moves from dealing with one shock to another. While the inflation shock is receding, both fiscal and monetary policy will hold the economy back in 2024. The Government has little room for manoeuvre on tax cuts and with more borrowers being forced to refinance their mortgages at much higher rates, the impact of past monetary tightening will continue to build. There is light at the end of the tunnel, however, as real wages should continue to recover in 2024 and as interest rates start to fall in the latter part of the year.”
The Good News
To quote Paul Martin, UK Head of Retail for KPMG: “Even if the economic outlook remains muted, one thing history teaches us is that following a downturn we often experience an upturn, and the question should be, are you doing everything now to prepare for this?”
So, there are grounds for optimism, particularly for those retailers that worked hard to confront all of their challenges, work that will in 2024 start to pay off, leading some to consider for the first time in three years the holy grail of growth.
Clues as to where that growth will come from in 2024 are everywhere, particularly in Grocery, and Health & Beauty. Other winners will be those able to meet the needs of consumers who increasingly shop across multiple channels, so single-channel or pure-play operators will find it more difficult to prosper and deliver a profitable return. Therefore, the future of retail is likely to focus on hybrid business models that seamlessly connect all channels and touchpoints.
New growth models, such as retail media – already strongly adopted by the likes of Tesco, Currys, and Kingfisher – may already be paying off. And this will lead to other new ideas and further developments around: closed-loop (end-to-end) social commerce buying journeys; cross-border; hybrid marketplaces where retailers sell their own brand and 3 rd party goods; subscription retail; and platform business models adding 3rd party brands either directly owned or in partnerships, the likes of which have been so successfully demonstrated by NEXT and M&S, for example.
Retailers will be hoping for greater financial and political stability as a foundation for this growth, and with interest rates now potentially having hit their peak and a general election pending within the next 12 months, this is certainly achievable in 2024 for those that focused on innovation and efficiency in 2023.
What this means, observable in 2023, is an even stronger polarisation between winners and losers, between discounters and high-end retailers, between differentiators and ‘me-too’s, between essential and non-essential. The squeezed middle will face higher debt servicing costs, a loss of market share, possible acquisition by larger rivals, or – ultimately – even extinction.
As retail consultant, Mauren Hinton, said: “Retail demand may be stabilising but costs are increasing, squeezing profits. Consumers, who are also dealing with higher costs, are remaining selective in their spending, so retailers will need to deliver compelling offers, backed by strong finances, to succeed in 2024.”
For consumers, Hinton continued: “Price inflation slowing down and higher earnings, coupled with a strong labour market, will help to offset some of the higher housing costs consumers are experiencing, mortgage rates and rental increases in particular.”
The Bad News
- Economic policy remains a dead weight on the UK economy and retail businesses
- KPMG’s Economic forecast expects real GDP growth will slow to just 0.3% in 2024
- Impact of costs on households will rise as more people refix their mortgages and move into higher tax brackets, weakening consumer spending power for retailers
- Debt interest payments will climb to 5.7% of household income in 2024, more than double the 2022 level, squeezing consumer spending further
- The support from universal energy subsidies has been withdrawn, so real income growth will be subdued next year
- The National Minimum Wage rises again in April – while this will be welcome for consumers’ disposable incomes and may impact demand, it also represents a significant cost to retail businesses
- Some retailers are still holding large inventories, which will force discounting and lower margin
- Inflation pressures remain on households and businesses
- The disposable income divide between the industrialised North and the services-based South may widen
- Convenience falls prey to cost-cutting, which may affect home food delivery
- Business Rates rise by 6.7% in April 2024, offsetting the benefits of more favourable rent deals
- Pressure on subscription-based businesses is expected as consumers review their spending in light of squeezed discretionary spending budgets
The Good News
- A H2 general election may deliver financial and political stability that could boost business and consumer confidence
- 2023 winners in retail will consolidate their gains and move into sustaining growth
- Generative AI (Gen AI) will move from hype to happening and deliver measurable benefits
- Retail Media Networks offer retail businesses additional revenue streams, monetising 1 st party customer data and opening ad services and opportunities to 3 rd party brands and advertisers
- A consumer that has developed smart shopping habits since the pandemic will find ways to thrive
- M&A activity will grow on the back of lower valuations for struggling online and mid-market brands, with some possible consolidation in the online pureplay and luxury space
- The Health & Beauty sector will continue to thrive and a £7bn IPO for Boots may be feasible
- The circular economy will grow, albeit from a low base
- Retailers’ sustainability investments will start to pay off
- Competitive freight rates are expected to continue
- New physical concepts, especially in retail parks, are set to thrive, to include more hospitality
Retail Sector Performance – Winners and Losers For 2024
2022 was a very difficult year for the big quoted retailers, with both Food Retail and General Retail sectors amongst the worst-performing verticals in the whole stock market, but 2023 has seen quite a turnaround. The overall UK stock market has again been broadly flat in 2023, but the Food Retail and General Retail sectors have been two of the best-performing verticals this year, delivering strong top-quartile performance.
The performance of the big DIY and “big ticket” retailers has been hurt by the big rise in interest rates. Trading conditions have continued to be difficult for the online “pureplay” retailers, not least because their operating and marketing costs have risen.
Grocery and Health & Beauty performed strongly in 2023 and will continue to do so in 2024 with “bigger ticket” categories, such as Furniture and Electricals, performing poorly. Many others, like Apparel, will stagnate, particularly mid-market Luxury. General Merchandise, Discount, and Purpose-led Retail will also see growth, while there will be a contraction in Home, DIY, and Electricals.
Mike Watkins, Head of Retailer and Business Insight UK at NIQ said: “After two years of falling volumes in food retailing, we anticipate a return to volume growth in 2024. Across the £200billion food universe measured by NIQ, we are anticipating headline value growth in the region of +4% to +5% and volumes up around +0.5% to +1%. This assumes food inflation stabilising at around 5%, which clearly has some downside risk.”
Nick Bubb, Retailing Consultant at Bubb Retail Consultancy, analysed the share price performance of some of the key players in 2023 in search of clues as to what retailers can do to succeed in 2024 given the number of new pressures emerging.
Tesco and Sainsbury’s both saw their share prices rise by around 30% in 2023, a reflection of how well they managed the surge in grocery price inflation and the increasing success of their focus on loyalty card promotions.
However, as Bubb noted: “sales growth for the big supermarkets in 2024 is likely to be more subdued, with the boost from grocery price inflation dropping away.”
“As for the outlook for the General Retail sector, much will depend on when the Bank of England feels able to start to lower interest rates, to relieve the pressure on “big ticket” spending – although this is unlikely to be before the second half of the year. The political timetable will also start to exert an even stronger influence on the economic outlook, as the debate intensifies about the best timing of the next election for the Government, with some expecting an election in May after another “tax cutting” Budget in March and others expecting no move until November, once interest rates start to come down.”
“The two biggest sector constituents, Next and JD Sports, performed very well, however, in 2023 delivering c40% and c30% share price growth respectively. It has also been a good year for the discount chain B&M, but the best performer has been Marks & Spencer, which has seen its shares more than double this year, thanks to strong sales and margin growth in both Food and Clothing. The recovery of the General Retail sector augurs well for the expected IPO of Boots in 2024.”
These and other larger retailers will, however, have to deal with the changes in business rates announced in the Autumn Budget statement. As Jonathan De Mello, Founder & CEO, JDM Retail, added: “The changes to Business Rates set out in the recent Autumn Statement will help smaller businesses, but will do little to lessen the burden on multiple retailers, who represent the vast
majority of retailers in the UK. Whilst the small business multiplier will be frozen and retailers will be provided with 75% rates relief up to a cap of £110,000 per business, this doesn’t really help retailers with more than a handful of sites.”
Despite this, the picture is mixed for smaller retailers, as James Sawley, Head of Retail & Leisure at HSBC UK, explained: “The market has experienced an increase in administrations, signifying that the going is tough for small family run businesses, SMEs and independent retailers as, when compared to previous years, there have been fewer big name failures in 2023.” Throughout the whole of 2024, the cost of servicing loans will remain high.
With the media focus generally on the High Street and ideas for its recovery, the growth of Retail Parks has often been sidelined, perhaps mistakenly. This property category outperformed in 2023 and is set to do so again in 2024 at the expense of the High Street.
As De Mello added: “For the likes of Next and M&S, which have been trading on Retail Parks for some time, their stores are among their best performing. With a broadening of the offer away from just bulky goods, and more Food & Beverage operators seeking to trade on Retail Parks, they are increasingly providing a real alternative to High Streets.”
Supporters of the High Street are not expected to be able to come up with a solution, but there will be growth through conversion to more Hospitality and Leisure outlets, particularly in empty department stores.
Consumer Spending and Demographics
The UK, along with other mature Western economies, such as Italy, Germany, and France, is suffering from falling birth rates and ageing populations. By 2030, the UK population of 16 years and under will have reduced by 1.1 million over the decade, while those aged 65+ will have increased by 2.5 million (and these UK projections are based on net migration of 200,000 per year).
As Hinton explained: “This means old-age dependency (the number of 65 years and above versus those of working age) is increasing every year. Moreover, with an ageing population the need for healthcare increases. As retail and healthcare are the two largest employers in the UK, reductions in immigration and rising healthcare needs will make the competition for retail workers even more challenging, despite the progress of technology.”
The Office for Budget Responsibility (OBR) has said that consumers have been net beneficiaries of monetary tightening in 2023, as interest received on consumers’ savings has been greater than increased mortgage payments.
If true, it is a reminder that that only around 5% of households re-fixed their mortgages in 2023 while millions of families with savings have finally been receiving some return on their cash. However, next year another 1.5m (5%) households will have to make material changes to their lifestyle in order to pay higher mortgage rates, which together with rising rental costs, will no doubt be felt across the whole retail sector. This will put the onus on retailers to double-down on knowing their customers and using 1st party data and insights to personalise engagement, offer targeted pricing and dynamic promotions based on their unique preferences.
As James Sawley, Head of Retail & Leisure, HSBC UK, explained: “Older and more affluent people are most likely to have material savings and low or no mortgages, so we will see a polarisation of performance of those retailers serving this consumer base. Overall, with the continued tight labour market, strong wage growth, another rise in Minimum Wage, and falling inflation, I predict that consumer demand will surprise on the upside – but it will be certain demographics that will be driving this.”
Dominated as usual by food, the predictions for spend contain some interesting shifts. Retail Week’s ‘How They’ll Spend It 2024’ report talked to 1,000 consumers in October 2023 to find out. It found 86% were worried about the rise in living costs, while 46% said they were reconsidering their spending and 43% were focused on saving money.
- Food and grocery, 80.2%
- General merchandise, 23.7%
- Entertainment and eating out, 21.4%
- Fashion, 15.2%
- Health and beauty, 11.5%
- Toys and gifting, 10.1%
- Electricals and gadgets, 4.6%
- Sports and leisure, 8.9%
- Big ticket items, 9.5%
The context around these figures, as Hinton explained: “The trend of lower volumes and the switch to own brands will continue in 2024 as consumers prioritise their needs and are more selective about where they shop and what they buy.”
As indicated, those retailers that made the right investments in technology in 2023 will start to see the benefits in 2024. This is about innovation rather than fighting fires with existing systems.
Miya Knights, Retail Technology Magazine Publisher and Consultant, added: “Technology investments will continue to help separate retail’s winners from losers through 2024, just as it has increasingly done for over 25 years now, and at an accelerated pace ever since the Covid-19 pandemic. However, where it may have previously been enough to adopt and deploy technologies that allowed operators to catch up to their competitors, those who genuinely innovate using IT and digital will succeed next year. The real battleground for tech innovation will be in the supply chain. Too many retailers and brands must still improve forecasting accuracy to combat poor availability, overstocks, and markdowns.”
Gartner’s CIO and Technology Executive Survey
- Gartner’s results suggest 2024 is likely to be another breakthrough year for AI.
- Business intelligence and data analytics top the list of technologies respondents are increasing their investments (87%).
- This was followed by investment in cloud platforms (80%) and application modernisation (79%).
- However, at the same time 9% plan to reduce next-generation compute technology investment and 12% are pulling back on enterprise resource planning systems 12%.
Gen AI in 2024
According to Natalie Berg, Retail Analyst and Founder of NBK Retail: “Our ecommerce experiences are going to move away from their static, one-dimensional state and will become much more immersive, predictive and tailored to meet our individual needs. Retailers have aspired for hyper-personalisation for years; Generative AI (Gen AI) will finally make this a reality.”
Gary Whittemore, Head of Sales EMEA & APAC at RetailNext, added: “Retailers are opening and closing stores, as they always have. But what is different now and looking forward into 2024 is they will be able to make the right choices based on a better understanding of how their customers shop– what devices, channels, and apps they use to make a purchase.”
AI will also be used on the return journey to consumers to enable greater personalisation based on insight. As Watkins added: “All promotions should be personal and be supported with marketing messages that do more than just raise awareness of products.”
Other scenarios in development include AI-powered shopping assistants, which Mastercard is already said to be trialing. On the operational side, retailers have been exploring AI for smart forecasting on replenishment, pricing, and promotions, as well as automatic alerts for markdowns to reduce waste. In the supply chain, the objective is to leverage AI to manage exceptions more
The RTT members all agreed, that in a stagnant market, retailers need to go looking for growth and be ready for the recovery.
“Surviving the economic, geopolitical, and technological disruption of recent years has instilled a strong sense of resilience within the sector. Retailers have not only acclimated to volatility and uncertainty, but many have actually benefited from newfound operational agility born out of these circumstances.”
Natalie Berg, Retail Analyst and Founder, NBK Retail
With monetary and fiscal policy remaining a dead weight on the UK economy, the key challenges impacting retailers into 2024 are expected to be:
- Rising cost pressures, including National Living Wage and Business Rate rises
- Weakened consumer demand due to:
o Continued squeeze on households through higher interest rate mortgage refixing for homeowners
o Rising rent costs
o Wage growth slowing and its benefit to consumers offset as more move into higher tax brackets
o High household debt servicing costs
But, despite these challenges, there remain several growth opportunities in 2024:
- Exploring growth models, such as Retail Media Networks
- Adopting platform business models following the success of Next and M&S
- Reassessment of asset classes, such as Retail Park settings
- Investment in tech, including Gen AI
- Innovation across commercial functions and the supply chain
- Tapping into new growth cohorts of consumers and moving away from a Gen Z focus to acquire and retain older, more affluent consumers
- Category winners seeing Food, Health & Beauty, and Purpose-driven retail outperforming other verticals.
PART II – Individual Views of the KPMG/IPSOS Retail Performance Think Tank Members
Paul Martin, UK Head of Retail – KPMG
The UK retail sector is no stranger to phrases like the “new normal” or describing a year as “incredibly difficult,” and 2023 has proven to be another challenging one. The industry has grappled with a continuous stream of obstacles, including decades of channel fragmentation, the impact of a global pandemic that shut down physical retail spaces and boosted online growth, the conflict in Ukraine, a cost of living crisis fuelled by high inflation, and shifting consumer behaviours – with more people returning to stores, especially retail parks rather than high streets. As a result, there have been lower sales (adjusted for inflation) compared to the previous two years, and certain categories have experienced a decline in sales volumes. It’s crucial to note, however, that the retail sector is resilient, and many businesses are adept at handling these challenges. While there have been some business failures, these have been limited, and several operators have used the past years to fortify their financial positions.
At this time of the year, thoughts are turning to what the outlook for 2024 could be, and in my opinion, the short answer is likely more of the same, especially in the short to mid-term. The Retail Think Thank predicted in August 2023 that the UK retail sector will likely continue to see significant downward pressures on demand, cost, and margin for the foreseeable future with a potential low-point being achieved in May 2024 (Retail Think Tank Whitepaper – July 2023 – KPMG UK). Business will be hoping for financial and political stability as a foundation for growth and with interest rates now potentially having hit their high-point and an election pending within the next 12 months this could be achieved in 2024.
We are also experiencing a polarisation within the sector into winners and losers. What on the face looks like a similar dynamic we witnessed during the pandemic with winning and losing categories (often those described as “essential” and “non-essential”) albeit with different categories to 2020 and 2021. The dynamic is now different – grocery and health & beauty performed strongly in 2023 and will continue to do so in 2024 with “bigger ticket” categories like furniture and electricals performing poorly and many others like apparel stagnating. What is different now though is the fact that we are now experiencing winners and losers within categories – in some cases irrelevant if the category is performing or not – this comes down to the quality of the individual operator and how well they are set up for the future.
For 2024 growth will likely remain modest therefore retailers need to continue focusing on the 4P’s that matter the most – People, Planet, Profit and Purpose (like in 2023 – Retail’s delicate balance – KPMG UK)
In times of economic uncertainty, the “Planet” agenda is potentially one of the easiest areas to de-prioritise and we are currently seeing this manifest itself in various announcements from businesses and policy-makers around the world. This though will have long-term implications for our futures and whilst businesses need to be profitable to deliver a meaningful impact, assessing which areas can make a material impact both financially and societally should be a focus in 2024.
In the same measure, retailers should not be forgetting about growth and innovation. Even though the approach to delivering this may have evolved (Retail Think Tank October 2023 – KPMG UK) the principle has not. With that in mind innovating how you go to market and how you organise your business will be essential – we have learnt that consumers shop across multiple channels and single-channel operators often find it more difficult to prosper and deliver a profitable return. Therefore, the future of retail is likely going to focus on hybrid business models that seamlessly connect all touchpoints.
Even if the economic outlook remains muted, one thing history teaches us is that following a downturn we often
experience an upturn, and the question should be are you doing everything now to prepare for this.
Nick Bubb, Retailing Consultant, Bubb Retail Consultancy Ltd
2022 was a very difficult year for the big, quoted retailers, with both the Food Retail and the General Retail sectors amongst the worst-performing sub-sectors in the whole stock market, but 2023 has seen quite a turnaround.
The overall UK stock market has again been flat in 2023, but the Food Retail and the General Retail sectors have been two of the best-performing sub-sectors this year, delivering strong top-quartile performance.
The relative performance of the Food Retail sector has faltered a little in recent months, after a strong start, but overall it is still running about 21% up so far in 2023, reversing much of its underperformance in 2022. And the sector would have done even better, but for the continued sell-off in Ocado, given the further unwinding of the Covid lockdown boom in Online grocery shopping. The two big supermarket players have done very well in 2023, with Tesco and Sainsbury both broadly 30% up in share price terms, reflecting the impressive way they have managed the surge in grocery price inflation and the increasing success of their focus on loyalty card promotions. Sainsbury, for example, saw its sales growing nearly as fast as Aldi in November (c10% and c11% respectively), according to the latest Kantar data.
Sales growth for the big supermarkets in 2024 is likely to be more subdued, with the boost from grocery price inflation dropping away and pressure on volumes continuing, given the pressure on consumer spending. In fact there may come a point when operating costs start to grow faster than top-line sales, given the increase in the minimum wage in April, but Tesco and Sainsbury generally look well placed. Elsewhere, it will be interesting to see how effective the launch of the much-awaited Waitrose loyalty card will be next spring, how the new French CEO of Morrisons tries to revive the business, and how Asda deals with its debt mountain and pushes further into convenience store retailing.
The General Retail sector is more diverse than the Food Retail sector, but overall it has done even better in 2023, running about 26% up so far this year. The performance of the big DIY and “big ticket” retailers has been hurt by the big rise in interest rates, whilst trading conditions have continued to be difficult for the Online “pure play” retailers. The two biggest sector constituents, Next and JD Sports, have done very well, however, delivering c40% and c30% share price growth respectively. It has also been a good year for the discount chain B&M, but the best performer has been Marks & Spencer, which has seen its shares more than double this year, thanks to strong sales and margin growth in both Food and Clothing.
Given its increasingly impressive store estate, after a splurge of store openings and revamps in November, Marks & Spencer looks well-placed for 2024. Elsewhere, there will be much interest in who John Lewis Partnership picks to be their new Executive Chairman and where Frasers’ stake-building in the likes of ASOS and Boohoo ends up.
As for the outlook for the General Retail sector in general, much will depend on when the Bank of England feels able to start to lower interest rates, to relieve the pressure on “big ticket” spending, although this is unlikely to be before the second half of the year.
The political timetable will also start to exert an even stronger influence on the economic outlook, as the debate intensifies about the best timing of the next Election for the Government, with some expecting an Election in May after another “tax cutting” Budget in March and others expecting no move until November, once interest rates start to come down. There is little doubt, however, that despite the political spin, the economy will remain in the doldrums and the next Government will inherit a mess, in terms of the state of the public finances.
Maureen Hinton, Retail Consultant
Retail demand stabilising, but costs increase, squeezing profits
With costs rising and consumers remaining selective in their spending, retailers will need to deliver compelling offers, backed by strong finances, to succeed in 2024. After the disruptions caused by the pandemic, a war in Europe, and inflation, retail demand growth will start to settle back into its pre-pandemic pattern of fairly low single-digit growth as consumers return to normal shopping patterns.
Price inflation slowing down, and higher earnings coupled with a strong labour market, will help to offset some of the higher housing costs consumers are experiencing (mortgage rates and rental increases in particular).
The trend of lower volumes and the switch to own brands will continue in 2024 as consumers prioritise their needs and are more selective about where they shop and what they buy.
A slow housing market, and the pandemic boom for home-related big-ticket items and technology delaying the replacement cycle, will make it more competitive for home-related sectors. Meanwhile, food & grocery will continue to benefit from the cutback in hospitality spending, while health & beauty is regarded as a necessity (health & wellness) as well as an affordable indulgence. As ever success in clothing & footwear depends on those retailers and brands who understand and inspire their customers.
Retail costs increasing
The problem for retailers will be rising costs. Inflation easing in the supply chain will help buying-in margins, but new, government-driven costs will hit retailers from April onwards, primarily;
- Business rates – higher property costs
- Higher living wage, apprenticeships – employment costs
- Immigration restrictions – pushing up salaries, reducing supply – employment costs
With regard to the latter, immigration, the UK, along with other mature Western economies, such as Italy, Germany and France is suffering from falling birth rates and ageing populations. By 2030 the UK population of 16 years and under will have reduced by 1.1 million over the decade, while those aged 65+ will have increased by 2.5 million (and these UK projections are based on net migration of 200,000 per year).
This means old-age dependency (the number of 65 years and above versus those of working age) is increasing every year. Moreover, with an ageing population the need for healthcare increases. As retail and healthcare are the two largest employers in the UK, reductions in immigration and rising healthcare needs will make the competition for retail workers even more challenging, despite the progress of technology.
Mike Watkins, Head of Retailer and Business Insight UK – NIQ
After 2 years of falling volumes in food retailing, NIQ is anticipating a return to volume growth in 2024. The reduced purchasing in 2022 was primarily due to elevated sales post-pandemic but in 2023 the decline was due to double-digit food inflation, which meant shoppers were paying more but buying less. Across the £200b food universe measured by NIQ, we are anticipating headline value growth in the region of +4% to +5% and volumes up around +0.5% to +1%. This assumes food inflation stabilising at around 5% which clearly has some downside risk.
Most of the growth in 2024 will again come from the Discount and Value retail channels with Aldi and Lidl having crossed the threshold of a combined 20% market share after over 20 years in the UK. With 1 in 4 households shopping Online every month (NIQ Homescan), Online will hold market share at around 11% of FMCG sales but in terms of shopper behaviour, it will be on-demand grocery delivery and smaller format physical stores including many Convenience stores that will continue to outperform most larger stores.
With (hopefully) less external disruption in 2024, NIQ sees 4 factors for the retail industry to consider.
Firstly, for many supermarkets, the quest to gain shopper loyalty – frequency of visits and total shopper spend – will intensify. The extension of loyalty schemes has helped pull back some spending lost to Discounters and NIQ research shows that 54% of shoppers state that price discounts via loyalty cards were the promotional mechanic most likely to encourage them to spend with everyday low prices a close second (34%). This reinforces the need for supermarkets to maintain transparent price strategies, price locks, and price matching.
Secondly, embracing the omni-channel shopper given that physical location has become less of a differentiator for food retailers since 2020. This means offering services that cover all aspects of digital shopping including step changes in subscription services and business models as the ecosystem evolves. For example, all promotions should be personal and be supported with marketing messages that do more than just raise awareness of products.
Thirdly, enhancing and improving the in-store experience, with significant investment in remodeling larger legacy stores and better use of in-store technology makes shopping easier. It also includes developing smaller stores, formats, and ranges that support shopping `little and more often` and the trends toward meal occasion purchasing. And finally, re-energizing healthy foods, social responsibility, and sustainable supply chains. With unprocessed and more sustainable diets rising the shoppers` agenda, this is an opportunity as inflation subsides but will require clear leadership actions to cement behavioral change in consumers.
All of this needs to be grounded in how we live, how we consume, and how we now shop given that the compound effect of food inflation has been a 20% fall in the purchasing power of shoppers since 2021 (NIQ Scantrack). For the volume recovery to be long-lasting, retailers will need to collaborate closely with their branded suppliers and logistic partners to lay the foundations for a retail reset in 2024.
James Sawley, Head of Retail & Leisure, HSBC UK
They say economists were invented to make weather forecasters look good. Hard landing, soft landing? Higher rates, lower rates? Higher taxes, lower taxes? Recession, modest growth? 2024 is a hard one to call. From the perspective of a big lender to the retail sector, I take much comfort from how well our portfolio of loans has performed in 2023. With that said, the market has experienced an increase in administrations, signifying that the going is tough for small family-run businesses, SMEs, and independent retailers, who typically cannot access finance outside of modest working capital loans. Looking forward, here are my top 5 predictions for 2024:
- Consumer spending/demographics – The OBR has said that contrary to the popular narrative, consumers have actually been net beneficiaries of monetary tightening in 2023 as interest received on consumers’ savings has been greater than increased mortgage payments. This is a remarkable stat if true, and reminds us that only some c5% of households have had to re-fixed their mortgage in 2023 while millions of families with savings have finally been receiving some return on their cash. Next year another 1.5m (5%) households will have to make material changes to their lifestyle in order to pay higher mortgage rates, which together with rising rental costs, will no doubt be felt across the whole retail sector. The reality is that older and more affluent people are most likely to have material savings and low/no mortgage, so we will see a polarisation of the performance of those retailers serving this consumer base. Overall, with the continued tight labour market, strong wage growth, another rise in the minimum wage, and falling inflation I predict that consumer demand will surprise on the upside but certain demographics will be driving this.
- Distress & M&A – We’ll see less distress in 2024, I’m a firm believer that if you’ve survived the last 10 years, you’ll survive the next 10. As highlighted above, many small businesses gave into the conditions of 2023, characterised by high inventory levels (low cash), peak inflation, peak energy cost, and the rising cost of capital. We now have normalised inventory (hopefully), low freight costs, falling inflation, and a clearer idea of where interest rates are settling, as well as an extension in business rates relief. M&A in 2024 will be characterised by P2Ps, a continuation of the trend seen in the back end of 2023 driven by lower valuations and dry powder. I think we’ll see some consolidation in the online pureplay and luxury space where high costs, intense competition, and softening of demand will make consolidation a compelling or necessary move. I also believe we might see some pressure on subscription-based business models as consumers review outgoings.
- Who will be the winners? I think the best-performing retail categories in 2024 will be Health, Beauty & Wellness as consumers favour the small luxuries in life and focus on wellness. Purposeful brands and those with strong sustainability heritage will enjoy good growth, albeit from a low base, and I believe circular economy platforms will continue to take market share.
- Pivot to Value or Luxury – The most successful retail companies in 2024 will either already be in the ultra-value or ultra-luxury space, or will be pivoting towards either end of the value spectrum. Whilst this is not an easy endeavour, the best brands will be focussing on how do I offer customers better value for money, or how do I give customers a feeling of exclusivity or desirability which they will pay handsomely for. The emergence of Shein and now Temu, both rapidly growing in the UK, is a reminder of just how value-conscious the consumer is right now, while only the ultra-luxury players are still performing well against softer consumer demand, especially from China.
- Peak convenience – I’ve never been convinced by business models which are predicated on people being lazy. I’m not sure people, or more accurately ‘enough people’ really need a service that brings them a pack of batteries on a moped for a significant premium, or are in such a rush they don’t have time to make a conventional payment. I believe in 2024 we’ll see an unwinding of businesses, set up in an era of ultra-cheap money, that tried to disrupt conventional wisdom by assuming consumers will be willing, and able, to pay for convenience.
Jonathan De Mello, Founder & CEO, JDM Retail Ltd
As 2023 comes to an end, it is important to look at recent trends, which will likely shape how retailers will fare in 2024. Whilst it is too early to predict how Christmas 2023 will pan out for UK retail – with 2022 surprising many with positive sales figures for some of the UK’s major high street multiples – Black Friday, which has become a key Q4 date for many, seems to have failed to resonate well with shoppers this year. Data from Barclays shows that transaction volumes on Black Friday 2023 were down year on year compared with Black Friday 2022. Whilst retailers appear to be more savvy with their discounting – offering significantly less deep discounts vs last year according to Which? – it seems that shoppers have been equally savvy; preferring to limit their spending, and potentially waiting for even deeper discounts to come as we move toward Christmas day itself. Black Friday is fundamentally margin dilutive and – at a time when retailers need to be selling product as close to full price as possible given rising costs – understandably, retailers haven’t discounted as deeply as prior years as yet. However, rising stock levels given lower demand may ultimately force them to do so. Retailers will be banking on strong Christmas sales to see them through to the end of the quarter. As with Xmas 2022, I expect in-store sales to outperform online sales – with retailers with a strong omnichannel offer (and of course Primark!) the true winners. Moving into 2024, with residential rents continuing to increase, more and more fixed-rate mortgages running out and inflation staying relatively high, the first two quarters of 2024 at least will likely see lower consumer demand – and a concurrent impact on retail sales and margins.
There are two key areas from a retail property perspective worth focusing on in any discussion on the Outlook for
- Business Rates: The changes to business rates set out in the recent Autumn Statement will help smaller businesses, but will do little to lessen the burden on multiple retailers – who represent the vast majority of retailers in the UK. Whilst the small business multiplier will be frozen and retailers will be provided with 75% rates relief up to a cap of £110,000 per business, this doesn’t really help retailers with more than a handful of sites. London retailers face a ‘double whammy’ of rising rates given the bulk of London’s retailers are multiples, and the fact that business rates in London are significantly higher than the rest of the UK – with a number of retailers exceeding the £110,000 cap from one site alone. In the context of continued high inflation and rising costs across their supply chain, many retailers will have been hoping for more assistance from the government – perhaps freezing the multiplier for all retailers instead of just small businesses for example.
- Increased Retail Park Demand: Retail parks proved to be a hugely resilient asset class during COVID – with large stores positioned close to residential areas that could be driven directly to, offering free parking. Their popularity has continued post-COVID for similar reasons. For retailers, they provide modern, purpose-built accommodation and a generally affluent, family-oriented shopper. This is why more and more comparison goods retailers are keen to trade in retail parks. For the likes of Next and M&S – who have been trading on retail parks for some time, their retail park stores are among their best performing. With a broadening of the offer away from just bulky goods, and more food and beverage operators seeking to trade on parks, they are increasingly providing a real alternative to high streets. The challenge for high streets is to reinvent themselves in light of this – providing more of a community hub offering a mix of uses to visitors. They need to provide something that retail parks can’t – and that often includes a mix of retail, F&B, leisure, offices, residential, and health and wellness. There is a place for both to co-exist in today’s retail world, though creative solutions are needed to maintain high street health in light of the growth of retail parks, to mitigate the structural vacancy we have seen following various high-profile retail business failures over the past few years such as Debenhams, Arcadia and more recently Wilko. Retail parks are here to stay and park performance in 2024 will continue to improve relative to other asset classes, as the tenant mix in such parks continues to broaden and strengthen.
Miya Knights, Retail Technology Magazine Publisher and Consultant
Technology investments will continue to help separate retail’s winners from losers through 2024, just as it has increasingly done for over 25 years now, and at an accelerated pace ever since the Covid-19 pandemic.
However, where it may have previously been enough to adopt and deploy technologies that allowed operators to catch up to their competitors, those who genuinely innovate using IT and digital will succeed next year.
Retailers will predicate their success on the fact that the “new normal” is here for consumers and is digitally enabled and data-driven. Those retailers and brands unable to reflect and respond to this fact will lose out.
But where is this investment best placed? Enhancing both online and in-store digital offerings to provide a truly omnichannel customer experience (CX) will continue to be essential but should be seen as table stakes nowadays.
The real battleground for tech innovation will be in the supply chain. Too many retailers and brands must still improve forecasting accuracy to combat poor availability, overstocks, and markdowns.
In both the customer-facing and supply chain areas of their businesses, the ongoing development of AI systems that incorporate Big Data and large learning models (LLMs) will be critical. Here, more compelling generative AI use cases will emerge.
The industry must use genAI to add dynamic personalisation to all aspects of the CX through marketing, merchandising and service applications.
GenAI applied in the back office must increase efficiency and productivity by helping executives and analysts orchestrate supply chain management by exception and at scale.
So, AI will continue to be the game-changing technology. But Gartner’s CIO and Technology Executive Survey results suggest 2024 is unlikely to be another breakthrough year for AI, given the spending intentions it reveals.
It’s great that business intelligence and data analytics top the list of technologies respondents are increasing their investments in, cited by 87%, followed by cloud platforms (80%) and application modernisation (79%).
But how does this square with the 9% who said they plan to reduce next-generation compute technology investment and 12% pulling back on enterprise resource planning systems?
If the industry doesn’t tackle the endemic and systemic underinvestment in supply chain and store-based IT this year, particularly given the advances AI is already delivering for those already winning with consumers, we will likely see many more casualties than in 2023.
Natalie Berg, Retail Analyst and Founder of NBK Retail
Surviving the economic, geopolitical, and technological disruption of recent years has instilled a strong sense of resilience within the sector. Retailers have not only acclimated to volatility and uncertainty, but many have actually benefited from newfound operational agility born out of these circumstances. As the 19th-century German philosopher Friedrich Nietzsche once stated: “That which does not kill us, makes us stronger.”
So, as we look ahead to 2024, it’s firstly worth calling out that whatever is thrown at retailers, they will be far better equipped to handle it than they might have been just a few short years ago. While I wouldn’t dare suggest that 2024 will be uneventful, I think retailers would certainly welcome more stability. The worst of the cost-of-living crisis is behind us, with inflation continuing to ease and wage growth even outpacing inflation in recent months. Consumers have been surprisingly resilient thus far, but we’re not out of the woods just yet. Shop prices may be decelerating, but they are still rising. Mortgage bills are going up for millions of households. And we no longer have a cushy Covid savings to fall back on. What is more, consumers have been operating in a heavily inflationary environment for two years now. When your spending power is continuously being eroded over a sustained period of time, you’re simply not going to alter habits overnight.
Consumers, therefore, will continue to exercise caution and restraint, leaving retailers to contend with somewhat muted demand, heightened expectations and cost pressures of their own – from business rates to hefty increases in minimum wage requirements from April 2024.
In terms of trends and innovation, it’s sometimes difficult to separate the hype from the reality but generative AI will truly move the dial for retailers. 2023 was the year that generative AI propelled into the mainstream; 2024 will be the year of integration. While this will provide countless opportunities to drive efficiencies across the value chain, I’m personally most excited to see how generative AI elevates the online customer experience. Our e-commerce experiences are going to move away from their static, one-dimensional state and will become much more immersive, predictive, and tailored to meet our individual needs.
Retailers have aspired for hyper-personalization for years; generative AI will finally make this a reality. AI-powered assistants are going to make our shopping experiences easier, more connected and more relevant than ever before. This will be a game-changer and it’s going to happen in 2024, not 2034.
I’m also excited to see how retailers progress the ESG agenda in 2024. The pre-loved movement continues to gain momentum, perhaps in part fuelled by the desire or need for value in the current climate. As secondhand shopping becomes normalised, I believe we’ll see greater demand for durability, traceability, and more transparency around retailers’ broader circularity efforts.
AI and sustainability are poised to see the most progress in 2024, but there are plenty of other trends and strategic initiatives that will accelerate as we move into the New Year: the broader convergence of physical and digital commerce; the democratisation of white-glove service; tech-enabled human touch; retail media networks (Currys, Tesco, and others are looking to grow advertising revenue); social commerce and liveshopping; last mile innovation (Amazon will debut drones in the UK in 2024); and the need to collectively find solutions to address retail’s perennial problem – returns.
The only constant in retail? Change.
Gary Whittemore, Head of Sales, EMEA & APAC at RetailNext
Despite a fall in inflation, a rise in wages, and an easing in the cost-of-living crisis, consumers are still struggling with high costs, not least mortgage, rent, and energy bills. Cash-constrained as they go into the most expensive time of the year, consumers are not going to be of much help to retailers in early 2024, and the prospects from there still look poor.
That said, some growth is predicted (0.6%), however, this is in the context of a contraction in the economy of 4% (OBR) since Brexit. While growth remains slow, if not stagnant, and with huge pressure on seasonal consumer spending and its impact on disposable income for 2024, the outlook for retail is muted for most sectors outside grocery and beauty.
A recession in the middle of the year has not been ruled out. Goldman Sachs and CEPR economists predict a significant recession, with a 2.5% contraction in GDP, while the CBI predicts a growth of 1.8%. The Bank of England’s target inflation rate is unlikely to be met until 2025. In 2024, it is expected to be 2.8% over the year.
Wage settlements are expected to fall to 4.5%, which should ease the likelihood of higher unemployment. A slowdown in employment in the U.S. though may be reflected in the UK, at least in the first half year.
Government borrowing remains at a 50-year high and the Chancellor’s recent handout will make little impact on this. The uncertainty around the timing of a general election and the impact of geopolitical events on interest rates and inflation add further complexity to understanding the outlook.
More stores, fewer stores
The argument between physical and digital has for many years tended towards the partisan – who will win? But in reality, some retailers are opening stores and some are closing them, as they always have. What is different now and looking forward into 2024 is they will be able to make the right choices based on a better understanding of how their customers shop – what devices, channels, and apps they use to make a purchase. Predictions that online will soon be more than 50% of all retail are false given that the rate of growth has been slowing in recent years and also that the cost of trading online is now on a par with stores. While there will still be pressure on the high street as we have evidenced with declining traffic a definite trend for a few years, and the push to out-of-town, a well-executed omnichannel approach will be the winning formula.
Fewer staff, better performance
The trend for fewer staff in stores has been with us since before the pandemic. As wages have risen and the stock pool has shrunk, retailers are having to provide an even better service to an ever more demanding customer but at a lower cost. The key to this is the processes and devices they are equipped with, the apps that make work both easy and fun, and the data to drive them. These disparate objectives, which are often the responsibility of multiple departments, will get closer in 2024 to enable the emergence of super users that can switch between roles depending on the circumstances in store.
Expensive to set up and manage, many retailers nevertheless wanted to show their sustainable credentials as well as support their customers’ desire to upcycle rather than dispose of unwanted apparel and gifts. In 2024, those that have set up schemes will want to offset the running costs and analyse how successful they actually are with customers. What generates a great headline does not always flatter the bottom line.
Charles Burton, Director, Oxford Economics
We expect the UK economy will struggle to gain momentum in 2024. Pressures on consumers and firms from high inflation may be easing, but the economy faces major headwinds from the lagged impact of monetary policy tightening and tight fiscal policy settings. We think three key themes will shape the outlook next year.
The economy will tread water as it moves from dealing with one shock to another. The inflation shock is receding and real wages should continue to recover in 2024. But with more borrowers being forced to refinance their mortgages at much higher rates, the impact of past monetary tightening will continue to build. The support from universal energy subsidies has been withdrawn, so real income growth will be subdued next year. Though the UK economy is likely to grow by only around 0.6% this year, it will be a much better performance than we and most other forecasters anticipated back in January. The boost from substantial fiscal support – particularly energy support payments and the super-deduction – and the stoicism of consumers have helped the economy to eke out modest growth in 2023. But while activity surprised on the upside in 2023, we have become gloomier about prospects for 2024, with no acceleration in growth expected in the immediate future.
The broader impact of tighter monetary policy will spread. Poor mortgage affordability will keep housing transactions very low and the affordability correction in house prices will continue. Over the next twelve months, in excess of 1.5 million people will need to refinance previously fixed mortgages, as the fixed period expires. This will be a shock, as the new fixed annual repayment rate will be in the region of around 5.5%, compared with less than 2% for many before. We estimate that debt interest payments will climb to 5.7% of household income in 2024, more than double the 2022 level. The impact of higher mortgage costs will be seen in rising arrears and repossessions and is likely to spill over into unsecured credit. The company sector will also be affected by rising insolvencies, with higher interest rates just the latest in a string of cost shocks that firms have had to deal with.
There is light at the end of the tunnel. The labour market remains on course for a soft landing and growth prospects should improve from H2 2024 as inflation drops back to target. By the end of the year, we expect inflation to be close to the 2% target again, with the BoE in the early stages of a rate-cutting cycle. We could also, of course, see further temporary fiscal loosening in the run-up to the general election that has to be held by January 2025.
Meanwhile, the government has announced that the rate of employees’ national insurance contributions will be cut to 10% from 12% in January 2024, but this will only mitigate the freeze on allowances and thresholds. So household income growth, adjusted for inflation, is likely to be weaker in 2024 than in 2023. The consequence of all this is that household spending generally will only grow slowly, and likewise retail sales. There will be some variation across the UK, with the south (London, South East, and South West) performing better than average, with the Midlands, North East and Scotland faring less well. This is very much a reflection of job losses in the industrial sectors feeding into overall regional performance.