The UK retail sector faced significant headwinds in 2023, grappling with a sluggish economy, a cost-of-living crisis affecting consumers, high staff costs, political uncertainty, and a transformed trading landscape due to the lasting impacts of the pandemic. The Retail Think Tank (RTT) predicts that 2024 will be another challenging year, characterized by stagnation and retailers merely getting by, especially in the first half.
As consumers emerge from the holiday season, we can anticipate a shift towards cautious budgeting from January onward, contributing to continued downward pressure on demand, cost, and margin in the retail sector. The UK’s real GDP growth is expected to slow to a mere 0.3% in 2024, according to KMG’s Economic Forecast, reflecting the overall economic challenges.
Despite these challenges, there are glimpses of hope for growth in specific sectors. Paul Martin, UK Head of Retail for KPMG, emphasizes that opportunities lie in Grocery and Health & Beauty. The Health & Beauty sector, for example, is expected to thrive, with a potential £7 billion IPO for Boots in the cards, while other sectors like Furniture and Electricals may perform poorly.
The winners in 2024 will be those retailers who can meet the evolving needs of consumers shopping across multiple channels, emphasizing the importance of hybrid business models that seamlessly connect all channels and touchpoints.
However, the road to recovery will not be without obstacles. Rising costs, including business rates increasing by 6.7% in April 2024, pose challenges for retailers. The National Minimum Wage hike in April is a double-edged sword, boosting consumers’ disposable incomes while representing a significant cost for retail businesses. Inflation pressures persist on households and businesses, affecting both retailers and consumers. Retailers must also contend with the aftermath of the pandemic, with some still holding large inventories, leading to discounting and lower margins.
The impact of technology on retail cannot be overstated. Generative AI (Gen AI) is expected to move from hype to reality, delivering measurable benefits. Technology investments, particularly in business intelligence and data analytics, will play a crucial role in distinguishing retail winners from losers in 2024.
Amid the challenges, there are positive signals. Next, one of the UK’s major retailers, reports a rise in full-price sales, indicating some resilience in the market. Furthermore, 74% of UK retail leaders surveyed by Retail Week express optimism about growth in 2024, marking a more positive outlook compared to the previous year.
However, the road to recovery is not uniform for all retailers. Larger players like Tesco and Sainsbury’s saw share price increases in 2023, but smaller retailers face tougher conditions, with an increase in administrations indicating a tough environment for independent businesses.
As the year progresses, the UK retail sector will closely monitor key indicators, including interest rates, political stability, and consumer spending patterns. Navigating the challenges of 2024 will require retailers to innovate, adopt technology, and deliver compelling offers backed by strong finances to succeed in an environment of recovering real wages and shifting consumer behaviour. Thus, H2 shows more promise for the retail sector as ineptest rates and political stability is expected.