Retailers to face weak demand and higher costs in New Year: industry report

Falling consumer demand combined with a barrage of rising costs is set to create a challenging six months ahead for the retail sector, an assessment by KPMG/RetailNext Retail Think Tank (RTT) members has shown.

With early indications of a disappointing Christmas trading period for some retailers, particularly in non-food categories, and food retailers resorting to increasing the level of promotions in order to drive sales this year, there will be very little respite for the retail sector as it enters 2024, according to the latest KPMG/RetailNext Retail Health Index (RHI).

The RHI, which assesses the state of health of the UK retail sector by considering the three key drivers of demand, margin, and cost, concluded that beleaguered consumers will hit the pause button on spending even further in the opening months of 2024.

Despite having more money in their pockets than they did in the first quarter of 2023, consumer sentiment is likely to remain low as the mood music around an ailing economy impacts their willingness to spend, the RTT concluded.

The RHI has recorded a deterioration of retail health every quarter since Spring 2022 and this is predicted to continue in the first half of 2024, hitting 66 points by the close of the first quarter of 2024, a figure last seen in the height of the pandemic in 2020 when the UK was in lockdown.

While the opening months of 2024 are likely to see a continued downturn in consumer demand, especially in non-food categories, it is just the calm before the storm as the second quarter will see the sector hit by rising costs, including a hike in the minimum wage and a 6.7 per cent business rate increase for most retailers, it noted.

While demand is likely to pick up in Spring 2024 as consumer confidence builds, rising costs will hit retailers, particularly those whose finances are not stabilized, RTT concluded, signaling potentially higher insolvency rates for small retailers and a boost in M&A activity – particularly in fashion and pure online retail, where there will be pressure on consolidation.

Highlights from the KPMG/RetailNext Retail Health Index included:

• Savers enjoying higher interest rates are unlikely to be tempted to spend savings in early 2024
• Health and beauty are expected to be the only non-food category to see growth in the opening months of 2024
• Luxury retail and big-ticket categories will continue to experience a downturn in sales
• 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
• Growth in 2024 will come from the discount and value retail channels
• London retailers face a ‘double whammy’ of rising business rates given the bulk of London’s retailers are multiples, and the fact that business rates in London are significantly higher than in the rest of the UK
• Further promotional activity is expected as retailers look to clear down excess stock and react to falling consumer demand

Commenting on the RHI, Paul Martin, UK head of retail at KPMG, said: “Despite Black Friday sales going deeper and lasting longer than last year, indicators so far are that Christmas trading this year has been one of the worst since the pandemic hit, and although there is still all to play for in the final weeks of December, it is looking as if it’s too late turn fortunes around.

“Whilst food retailing sales growth has been weaker than seen over Christmas last year, sales of non-essential goods have been deteriorating rapidly and will continue to do so as consumers keep an even tighter grip on the household purse strings.

“It has taken a long time for the economic challenges to feed through to consumer resilience, but it looks as if it’s happening now, and is set to stay with us, at least until spring. The UK retail sector will likely continue to see significant downward pressures on demand, and margin, for the early part of 2024 but this could turn a corner by April, just as hefty increases in minimum wage and business rates hit the bottom line. Retailers will be holding their breath for some good news in the chancellor’s Budget in March.

“Retailers have been remarkably resilient over the last few years and are now well versed in being agile to cope with economic shocks and changing consumer demands. Pressures on consumers from high inflation may be easing, but the economy faces headwinds from the lagged impact of monetary policy tightening and rigid fiscal policy settings. For the next few months, we expect the retail sector to continue to tread water as it moves from dealing with one shock to another.”