Consumers are choosing to keep a tight rein on non-essential spending
January 2024: The slight improvement in consumer confidence is yet to materialise at the tills.
Linda Ellett, Head of Consumer, Leisure & Retail at KPMG, said:
"It may be a new year, but the hangover of low consumer confidence remains, with retail sales growing by a lacklustre 1.7% on the high street, and online operators seeing yet another month of negative sales performance.
Health and beauty purchasing continued to drive sales both on the high street and online, whilst sun seekers and consumers with healthy resolutions front of mind, gave a boost to sports and travel equipment sales, which were up over 4% year on year.
The extraordinary weather conditions across large parts of the country did little to encourage shoppers out on to the high street, whilst continued industrial action on the rail network was unhelpful for city centre locations. Whilst there are some positive signs that mortgage rates are starting to fall and stabilise, and shop inflation has fallen to its lowest level in over a year the feel good factor has yet to materialise at the tills.
It remains a difficult environment for retailers facing into significant downward pressures on demand, a strong promotional environment and uncertainty hitting supply chains due to rising geopolitical tensions. Retailers will be hoping that continued good news on the economy, coupled with the small boost given to some consumers as cuts in national insurance start to feed through to pay packets will boost confidence and convert to sales. With increases in labour costs and business rates around the corner, retailers will be hoping for good news in the Chancellors’ upcoming Budget to give consumers that lift they need to start spending again.”
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The festive season presented a challenging backdrop for retailers
“The festive feel-good factor was lacking this year as many retailers faced a disappointing December with sales growth only up 1.7% on 2022.
Christmas shoppers ditched clothing, jewellery, and technology gifts, opting for beauty, health, and personal care products, which, along with food and drink drove festive sales this year. Online sales remained in negative territory, although the decline was weaker than seen in recent months with sales down nearly 1% on last year.
Retailers rolled out promotions that lasted longer and were deeper than last year and higher promotional activity amongst supermarkets saw grocery price inflation fall at its fastest rate on record in December. Whilst promotions are margin dilutive, retailers have done some great work in re-engineering supply chains to make them more cost effective, which has given more room to push ahead with discounting, and given the current environment, this is likely to stay with us for a while.
Despite falls in inflation, an upcoming cut in national insurance rates, and some consumers having more money in their pockets this Christmas than last, the constant drip of economic challenges they’ve faced over the last two years has finally come home to roost. As we start a new year, cautious consumers are battening down the hatches and retailers can expect to see significant downward pressures on demand in the opening months of this year, which will ease off by Spring if the economic conditions continue to improve and confidence slowly returns.”
Retail sales in November fell short despite Black Friday efforts
“With the clock ticking down to Christmas, sales growth in November remained weak at 2.7%, despite a big push from retailers around Black Friday deals.
Food and drink, health, personal care, and beauty categories continued to drive growth whilst jewellery and watches saw the biggest decline in sales on the high street, suggesting consumers are abandoning expensive presents in favour of more budget friendly gifting. Online sales fell yet again, but penetration rates rose by 5% on October to 41.5% as consumers shopped around for Black Friday bargains.
With less than a month to go and sales growth limping along, the cost-of-living crisis has taken its toll on Christmas spending for many households, and the continued economic conditions are testing consumer resilience. Price remains the main purchasing driver, so we are likely to see a prolonged and well targeted period of discounting as retailers compete hard for a shrinking pool of spend and will need to clear stock.
With two of the three months of the crucial golden quarter seeing sales growth below 3%, it has already been a weak Christmas trading period. Any excess stock not sold before Christmas could be further reduced leading to big January sales, and potentially having an even greater impact on already tight margins. As we look to the first few months of 2024, we can expect the challenges to continue which could lead to further casualties in the sector, particularly pure online players facing more than 28 months of consecutive sales decline.”
Retail sales remained weak in October with growth of just 2.5%
"Retail sales remained weak in October with growth of just 2.5%. Food and drink and health and beauty categories continued to drive sales, while a mild October saw consumers put off shopping trips to replenish winter wardrobes. Online sales continued to struggle, with negative sales growth recorded in every category other than health and Other Non-Food. This could herald the most competitive Black Friday period that we’ve seen in a while.
“Whilst consumers are now operating in a lower inflationary environment compared to October last year where inflation peaked at over 11%, there is no doubt that the last 12 months have taken a toll on confidence and their ability to spend. Coupled with a higher interest rate environment, dwindling covid savings and the heating coming back on, beleaguered consumers are thinking very carefully about how they spend their money. As a result, the strong demand that has kept some retailers afloat over the last 18 months is now falling away.
“Although the retail sector has done some sterling work around controlling their own cost environment, the health of the industry is at the mercy of macro demand. Retailers are facing a challenging Christmas, competing for a shrinking share of wallet, driven by promotions that will no doubt cut into already stretched margins. With spending levels expected to be much more muted this year, the run up to Christmas could be the most challenging we’ve seen since pre-pandemic days.”
Retail sales in September up 2.7% vs prior year
“Retail sales continued to limp along, with growth up just 2.7% despite inflation falling in September.
Food and drink, and health and beauty continue to be the strongest performing categories on the high street, whilst a growing number of categories including clothing, fell into negative territory over September as the unseasonal warm weather delayed trips to the shops to stock up on winter wardrobe purchases. Online sales growth continued to fall, with just health, beauty and jewellery recording positive sales growth. September signals the 26th month of continuous online sales decline and retailers will be hoping for a strong Black Friday in order to turn the tide.
With the warmer weather delaying household heating being switched on, positive news around falling inflation and a hold on rising interest rates, consumers will hopefully be feeling more confident as thoughts turn to Christmas shopping.
After years of battling challenges, the resilience of the retail sector has been dented and we are starting to see the gap between the strongest and the weakest on the high street widen. The fight for Christmas shoppers will be fierce this year, with promotions likely to be earlier and abundant in a bid to loosen tight household purse strings. Consumers will continue to seek out good deals, with price driving purchasing decisions. This is likely to be one of the most important golden quarters that we have seen in years, as for some in the sector, it could very much determine their future.”
Retail sales in August up 4.1% vs prior year
“August saw a bounce back in retail sales growth to 4.1%, which will come as a relief for many retailers.
Health, beauty and food and drink were the strongest performing categories both on the high street and online, as consumers made the most of brief spells of sunshine to enjoy the summer holidays. Internet retailers continue to struggle as online sales fell yet again in August, dropping by 3% year on year.
As summer comes to an end, retailers will have their sights firmly set on the most crucial period of trading as consumers get ready for Christmas. Inflation levels are heading in the right direction, albeit much more slowly than hoped and savvy shoppers will be Christmas bargain hunting much earlier this year, as price continues to drive decisions and consumers seek out good deals that will stretch their budgets further. Becoming more calculated and more aware of what they are getting for their money than we have seen for a long time, means retailers will have to fight harder for every sale.
Having fought off the pandemic and the cost of living crisis, we are already starting to see the resilience of the sector start to fade and high street casualties are starting to emerge. Maintaining consumer confidence as we head into the golden quarter will be absolutely vital for some in the sector, who will need a good Christmas in order to continue trading in 2024.”
Retail sales in July up 1.5% vs prior year
“As the storm clouds came out, shoppers retreated, with like for like sales growth a dismal 1.5% up in July. Furniture and food & drink were the best sellers, whilst the wet weather meant no need to restock summer wardrobes, with all categories of clothing falling into negative sales territory, in what is usually a busy month for clothing retailers. Online sales continued to slide, falling nearly 7% year on year, with just a handful of categories such as furniture, health and beauty performing well.
“We are starting to see a big rise in the number of promotions that retailers are putting in place in order to get shoppers through the door, as they battle to keep market share. Price conscious consumers are shopping more carefully, more aware of where bargains can be found and what they are getting for their money – which is biting hard into retail margins and profitability. UK consumers have been hugely resilient throughout the cost-of-living crisis, but stubbornly high inflation coupled with rapidly rising interest rates will test their ability and willingness to keep on spending for the rest of this year.
“Both consumers and retailers are finding that they are having to get used to doing more with less as conditions remain incredibly challenging."
Retail sales in June up almost 5% vs prior year
“The sun was shining on retailers in June, with the warm weather bringing consumers back out to the high street and like for like sales up nearly 5% on last year.
Sales of suntan lotion, food and clothing were all given a boost as consumers made the most of the record June temperatures. Online sales continued to fall in June, but at a much lower rate, with household appliances and gardening equipment proving popular with consumers.
Apart from a blip in May, retail sales growth has remained steady at around 5% every month in the first half of this year. However, the growth comes against a background of much higher inflation levels – resulting in reduced margins and profitability for operators across the sector.
As we move into the last half the year, retailers will be hoping that anticipated falls in inflation levels start to deliver stronger sales growth in order to improve the overall health of the sector. The wild card continues to be food inflation levels which remain stubborn, and are having a negative impact on consumers’ ability to spend on non-essential items.
Consumers have so far remained resilient, but the triple threats of further interest rate hikes, resolute double digit food inflation and an economy recovering at a much slower rate than predicted, could hamper a return to much needed profitable growth across the retail sector.”
Retailers saw mild growth in May, despite a month of bank holidays
“Despite warmer weather, a national celebration and month of bank holidays, retailers saw pretty mild growth in May with sales figures up just 3.9% on last year, and lower than the 5% growth seen in April.
“High street retailers saw more categories slip into negative sales territory last month, with health, beauty and food driving sales on the high street. The gloom continued for online retailers with just four categories registering positive sales figures and total sales down by 1%. Online penetration rates continued to slide sitting at 36%, as consumers return to bargain hunting in store.
“Retailers will be hoping that inflation levels in the wider economy continue to move in the right direction in order to boost much needed consumer confidence. The wild card for the retail sector remains uncontrollable food inflation, which shows little sign of coming down in the near future, and this is having a significant knock-on effect on non-essential spending. The grocery sector is the fastest growing part of the consumer wallet at the moment, so consumers are having to spend more of their money in the one area that is getting disproportionately more expensive.
“UK consumers are resilient, but with stubbornly high food inflation continuing and the prospect of further interest rate rises threatening to impact their ability to spend elsewhere, it is likely to be a long, hot summer for the retail sector.”
How much is inflation masking healthy growth for the sector?
“Retail sales held steady in April with 5% growth on last year, but against a background of higher inflation year on year, masking how much is actually healthy growth for the sector.
It was a mixed bag for the high street, with sales of footwear, food and jewellery performing strongly whilst more categories slipped into negative territory as clothing and computing continued to witness declining sales. Online retailers continued to feel the pressure in April, with both sales growth and penetration rates falling as the market rebalances after the pandemic and consumers choose to bargain hunt in store.
Consumer demand has so far been fairly resilient to the twin drags of high inflation and high interest rates, but as government energy support comes to an end for many, savings start to dwindle and other household bills rise, it is likely that the next few months will continue to be challenging as the consumer tank empties. Much hinges on whether soaring food inflation can be bought under control enough to allow consumers to comfortably start spending again on non-essential items.
Retailers will be hoping that the Coronation coupled with a month full of bank holidays and inflation levels starting to head in the right direction will boost consumer confidence significantly enough to start to see real, profitable growth.”
Retailers saw small growth across most categories in March
“Many Retailers hoping for a Mother’s Day boost will have been disappointed with the overall sector experiencing sales growth of just 5% in March, against a backdrop of rising inflation running at more than 10%.
High street retailers saw some limited growth across most categories in March, but as consumers cut back on eating out, spending on home comforts, accessories and furniture saw the biggest growth, as people look to entertain at home. Online retailers also benefited from the boost in sales of items for the home, but saw continued decline in sales across most other categories, particularly clothing.
As we enter the crucial month of April, rising utility costs, council tax and mobile bills coupled with frozen personal tax rates and the withdrawal of energy bill support will see consumers having to further cut back on discretionary spending. Consumers will continue to take steps to reduce spend where they can - switching where they shop, what they buy, and spending on fewer items.
The challenge for retailers right now is having to face into their own rising cost agenda, as the rise in minimum wage rates comes into effect and inflation continues to challenge margins, whilst ensuring affordability, choice and value for customers, which will be key to keeping the tills ringing.
As the difficult economic conditions continue, retailers will be hoping that April prompts consumers to look for some comfort in tasty chocolate treats and the sun starts to shine forcing replenishment of summer wardrobes.”
Total sales growth of just 5% during February
“With overall inflation running at around 10%, and food inflation sitting nearer 20%, total sales growth for February of just 5% will be eating hard into retail margins and masking the true state of the sector’s health.
Consumers are continuing to hold back on non-essential spending with sales of clothing, footwear and accessories, which have been very influential in spending for many months, continuing to decline in February. Furniture and homeware have been driving sales growth on the high street and online but we are starting to see more categories record negative sales year on year, as household budgets remain squeezed.
With increases in energy, broadband, mobile phone and council tax bills on the horizon, consumers will continue to take steps to reduce spend where they can - switching where they shop, what they buy, whilst also cutting back on activities, such as eating out and takeaways. As much of the growth in retail is being driven by inflation, price and promotional strategies have become increasingly important growth engines for retailers. Online retailers will also have to review their business models, and there are likely to be some failures in this space, particularly among the businesses that are currently over-valued following the surge in demand during the pandemic which has now decelerated.
The outlook will continue to be challenging with falling consumer spending in real terms and as more people choose to shop by ‘occasion’, retailers will be pulling out the stops for a buoyant Easter and Mother's Day.”
Consumers have started the year with a tight rein on spending
“With inflation running at around 10%, sales growth for January nearly halved in comparison to December to just over 4% - sending a clear signal that consumers have started the year with a tight rein on spending as they face another period of rising costs.
Sales of clothing continued to prop up the high street, with men’s clothes and shoes the strongest category in January, whilst purchases of energy efficient appliances remained a top purchase for consumers. The decline in sales taking place online continued this month, but is starting to level out and far from the 24% drop in sales that online retailers witnessed a year ago in January.
As we head into a difficult time for consumers, the short-term outlook for the retail sector remains challenging. With the latest interest rate rise and utility price increases heading our way, shrinking household incomes means we will continue to see a shift in what consumers buy and where they buy from. Retailers face a tightrope as their costs rise and margins are squeezed, whilst at the same time having to ensure affordability and value for customers. Although retailers have demonstrated resilience over recent years, it is likely we will continue to see casualties both online and on the high street this year. Those retailers that have emerged from the pandemic in good shape will benefit from the current situation through market-share growth and consolidation opportunities, but all retailers are facing a tough few months of falling consumer spending in real terms.”