Retail Think Tank July 2024

Add to that that some aspects of consumer behaviour have shifted more permanently as a result of the cost-of-living crisis, including the focus on being price savvy; with 3-in-4 shoppers putting price as a top three purchasing driver.

In order to grow, retailers must emphasise being the best in offering value for money, as well as tap in to the “experience” as consumers focus their discretionary spend on having fun or experiences over owning items.

Natalie Berg, Retail Analyst NBK Retail and Retail Think Tank member

“It’s not that consumers are abstaining from spending; they’re just being very selective about how, when and what they purchase. We continue to see consumers prioritise experiences over replacing clothes or big-ticket items, which will put greater strain on non-essential retailers in the coming months.”

The back-to-school boost in September is unlikely to offset low sales of clothing and footwear over early summer, with fashion retailers facing into more promotional activity to dispose of excess summer stock as they head into the key autumn season.

Rising costs are also expected to impact retail health in the quarter ahead, with rising freight prices and lower freight capacity putting a strain on the industry due to Chinese marketplace demand, particularly for younger shoppers.

Freight prices, which have traditionally sat at around $2000 per 40ft container are now costing retailers around four times that, assuming they can even get the capacity. Rents are also starting to rise, with attractive city locations such as London, seeing rent rises of up to 30% as vacancy rates have fallen from 70% to 90% in the last two year

Jonathan De Mello – Founder & CEO, JDM Retail Ltd

“The retailer/landlord relationship - at least for the most desirable locations - is starting to reset. Rents have been well below pre-COVID levels for some time, but we are slowly starting to see rental increases and lower incentives on offer for the biggest and best retail locations. This is due in part to rising occupier demand - particularly from F&B and Leisure operators - and less availability of suitable stock, as more and more formerly vacant spaces such as ex-department store units are re-let to alternative occupiers. It should be noted that such rental increases are certainly not being experienced by secondary/weaker locations - and if anything the gulf between prime and secondary locations has never been more pronounced; with secondary locations needing significant repurposing to alternative property uses over the medium term.”

No feel-good factor, just a less of a feel bad factor

Although the uncertainty around the General Election is over and a change in Government confirmed, and there appears to be an improving economic landscape, RTT members are not confident that this will translate to an immediate or significant boost in consumer confidence.

Linda Ellett, KPMG UK Head of Consumer, Retail, Leisure and Retail Think Tank member

“Consumer sentiment is likely to improve now we have the uncertainty of an election out of the way, but retailers are telling us that they are nervous about investing for growth – some even pausing it – as they wait for detail to see if tax rises and other costs might be coming down the line.”

However, as the mood music around a growing economy, falling interest rates and political stability feeds through to consumer confidence, the savings ratio is likely to fall and spending to gently tick up towards Christmas.

Who will win in the battle for retail growth?

According to the RTT, retailers can secure both short-term growth and long-term success in a rapidly evolving retail landscape by employing a number of strategies that put the customer at the heart of everything they do.

Value

Firstly, value retail was seen by the RTT as something that is here to stay, and those using promotions to generate trust in pricing will benefit, noting that savvy consumers though will jump from brand to brand to find price benefit. To trade up, targeting different food occasions has been successful for many grocers.

Eco and cost-conscious

There is a lot of talk about sustainability, but it is yet to emerge as a winning strategy for a retailer with cautious consumers. Sustainability is winning is where eco-conscious consumers are prioritising repairs over replacements or reconditioned over new – whether this is in clothing, electronics or furniture. Winning retailers managed to offer confidence in quality – the second most important purchasing driver for consumers at 3-in-5 shoppers – with price, through second-hand.

Seamless Commerce is the winning approach with shoppers

The RTT is clear, retailers should stop treating online and offline as separate channels, with separate teams – often competing – and instead create a seamless experience for customers across all touchpoints. This includes integrating mobile POS systems, digitising workforce management, and ensuring consistency in customer interactions regardless of the channel.

Linda Ellett, KPMG UK Head of Consumer, Retail, Leisure and Retail Think Tank member

“Consumers will discover, explore, choose, transact, receive, learn and ultimately use/discard/return across multiple digital and physical touchpoints. Retailers are often competing with themselves for customer acquisition/transactions, not connecting their customer understanding across data sets, and setting their operating model up inappropriately, to move forward with the consumer into this new digital era; those who get it right will win from a sales and cost perspective.”

Location, location, location; and colleagues

Investing in physical stores by opening in strategic areas, rationalising store estates, and enhancing the in-store experience was also an area that the RTT identified as key for winning retailers.

Jonathan De Mello – Founder & CEO, JDM Retail Ltd

“Retail parks are proving to be a particular strong asset class at the moment, with some retailers choosing to close down under-performing high street stores in favour of nearby retail parks. The type of occupier on retail parks has diversified also, with more F&B and comparison goods retail found on the best retail parks than ever before. Bulky goods parks are set to benefit too from a combination of hitting the peak of the household/electrical goods replacement cycle, and an uptick in the housing market in anticipation of lower interest rates to come.

“Physical retail space in general is proving increasingly attractive for retailers that principally trade online in particular, in the context of the rising cost of processing online returns. Such retailers recognise that they can use stores to attract customers using click and collect and offer free in store returns to customers.

“Retail parks are proving particularly popular as retailers close down unperforming stores in unattractive high streets and re-open in busier retail parks. There is a demand for more space from retailers who recognise they can use stores to attract customers using click and collect and free in store returns and the stronger margins on offer from having a physical space.”

Nick Bubb, Retail Consultant, Bubb Retail Consultancy Ltd and Retail Think Tank member

“Multi-channel retailers are clearly well placed to exploit the revival of “bricks and mortar” shopping, as well as the continued growth in Online shopping. Combining strong Food and Clothing/Home ranges has been a winning formula for one particular universal retailer and I think it’s great to see them investing in their store estate and taking on vacant former department store space, creating exciting Food Halls and well-merchandised Non-Food brands”.

To further drive customer engagement and increase sales, investing in store aesthetics and the colleague experience is key – whether the store environment, the digital tools, such as one large US universal retailer are using, or positioning staff as brand ambassadors

New offerings

The RTT was mindful of retailers becoming distracted, trying to be involved in too many different things for their customer, but done thoughtfully around the retailers’ USP in their customers eyes, it can be a winning strategy.

Disruptors such as a UK electricals retailer have invested in omni-channel experiences such as live consultations and video commerce, blending in-store expertise with online convenience.

Miya Knights, Retail Technology Magazine Publisher, Consultant and Retail Think Tank member

"Consumers continue to be driven by cost pressures, and the retailers well-placed to grow in spite of this are those that focus on digitally enabled and data-driven customer experiences, irrespective of channel. This UK electricals retailer is a great example, despite operating in the highly competitive and discretionary consumer electronics sector.

“But, with such high-touch, high-value sales, the focus on expert service and refurbishment is resonating well. This retailer has also invested in its circular economy model, owning the UK's biggest tech repair facility, and it is using gen AI advances to optimise its operations, as well as fuel consumer demand for the likes of new AI features.”

Retailers sit on huge amounts of data and using their customer data to understand buying patterns, preferences, and behaviours can guide inventory decisions, marketing strategies, and personalised customer interactions.

Retailers can monetise their customer data by creating retail media networks that offer brands opportunities to advertise to highly targeted customer segments, generating additional revenue streams.

In summary

The RTT concluded that it will take up to 12 months for higher wage inflation to drive the uptick in consumer spending, and meanwhile retailers will have to continue to battle for every sale they can find, and every cost saving they can find.