According to the KPMG/RetailNext Retail Health Index (RHI) report, non-food stores in the UK are expected to face a challenging beginning to 2024. The report predicts that consumer demand will weaken after the holiday season, as increased costs like rising mortgage and rental fees lead to reduced spending in the early months of the year.
Interestingly, some retailers, particularly in non-food categories, have already experienced disappointing Christmas sales. In order to drive sales, food retailers have resorted to increasing promotions, leaving little respite for the retail sector as it enters the new year.
The report highlights that consumers, burdened by financial difficulties, will further decrease their spending in the early months of 2024. Despite having slightly more disposable income compared to the previous year due to reductions in National Insurance Contributions, wage growth outpacing inflation, and lower fuel costs, consumer sentiment is likely to remain low due to concerns about the struggling economy.
Paul Martin, the UK head of retail at advisory firm KPMG, notes that the run-up to Christmas has been subdued, despite longer and deeper Black Friday sales compared to last year. Early indicators suggest that this year’s Christmas trading has been one of the worst since the pandemic began. Sales of non-essential goods have been declining rapidly, and consumers are tightening their household budgets even further.
The economic challenges are expected to continue impacting consumer resilience until at least spring, leading to significant downward pressure on demand and margin for the UK retail sector in the early months of 2024. However, there is a possibility that this trend could change by April, as increases in minimum wage and business rates start to affect retailers’ bottom line. The industry is eagerly awaiting positive news in the Chancellor’s Budget in March.
Despite the economic shocks and changing consumer demands, retailers have demonstrated remarkable resilience over the past few years. The report suggests that the retail sector will continue to navigate challenges in the coming months. Although inflation pressures on consumers may be easing, the economy still faces obstacles from the delayed impact of monetary policy tightening and inflexible fiscal policy settings.
Nick Bubb, an independent retail analyst and panel member, points out that Q4 2023 witnessed lackluster performance and volume pressure in non-food categories, indicating that consumers are reducing their spending. The discounting observed before Christmas is expected to persist afterwards. The outlook for the retail sector largely depends on when the Bank of England decides to lower interest rates to alleviate the pressure on big-ticket spending, but such an action is unlikely to occur before the second half of 2024.
The report also suggests that there might be pressure on retail consolidation, potentially resulting in an increase in buyout deals and mergers. Overall, the retail sector is preparing for a tough start to 2024.
Useful links:
1. KPMG/RetailNext Retail Health Index (RHI)
2. Bank of England
