Retail Think Tank - April 2026 release

Q1 confirmed that UK retail is holding up

A pre‑Easter uplift in March lifted Q1 total sales growth to 2.5%, exceeding the Retail Think Tank’s ~1% expectation; perhaps pointing to resilience rather than contraction or probably just benefitting from the Easter shopping period moving into Q1's figures this year.

That said, growth remains fragile and uneven. January benefited from promotion‑led spending, but momentum faded quickly as purse strings tightened again in February, reinforcing a picture of weak but broadly stable trading. March’s positive performance provided welcome relief but did not signal a material rebound in underlying demand, given the benefit from an earlier Easter.

Food continues to underpin overall growth, albeit price-led rather than volume-led; while Non-food and discretionary categories remain under pressure. BRC-KPMG Retail Sales Monitor data shows food sales up 4.5% over the quarter, largely boosted by strong growth in March of 6.8%. Non-food growth was more subdued at 2.2% as pressure continues for mid-market fashion, value apparel, home improvement and sports retailers as consumers resist purchases and take advantage of second-hand platforms¹.

Channel shifts continue in 2026, with continued E-commerce growth (+9%)² and Resale growth – with platforms such as Vinted now ranking as the third‑largest retailer by number of customers³ and higher income households (£75k+) are the highest percentage of overall users⁴.

Linda Ellett

Head of Consumer, Retail & Leisure

KPMG in the UK

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Looking ahead to Q2, the RTT predicts subdued growth, fragile confidence in the UK economy and limited upside.

Geopolitical uncertainty in the Middle East makes oil prices the single biggest swing factor for Q2 outcomes, with prolonged disruption leading to higher inflation, interest rates and lower consumer confidence.

Recent events in the Gulf have fundamentally altered the outlook for the UK economy generally and also specifically for the retail sector.

Charles Burton

RTT Economist

At around $100 per barrel, growth is expected to remain weak but intact; however, a sustained rise towards $140 would push inflation materially higher (to c. 5.5%) and tip growth into the negatives, raising recession risks in both the UK and globally⁵.

Higher energy prices will feed through into transport costs, food inflation and energy bills. Retailers will have to decide between lower margins or dampening volumes with price increases. Consumer sentiment is already fragile: while the majority of households still feel secure in their personal finances (54%), concern about the wider economic outlook remains elevated (62%)⁶— if the conflict persists, we can expect consumers to continue to hold back on big ticket items with retailers needing to work harder to trigger spending over saving.

Against this backdrop, interest rate cuts are no longer expected⁵, with any easing potentially delayed until 2027⁷, and while further increases are not the base case, they cannot be ruled out if inflationary pressures intensify.

There are some seasonal positives

Including a likely boost in food, hospitality and event-led spend driven by the FIFA World Cup (11 June–19 July) as seen in previous years. KPMG’s Consumer Pulse research ahead of the 2024 summer of sport found consumers planned to trade up for match occasions (20% intending to buy more snacks and 17% branded alcohol,11% planning to buy a BBQ and 5% a new TV)⁸. But these may only offer temporary respite to an otherwise challenging situation for retailers.

Therefore, the RTT sees Q2 being about resilience rather than growth. In this environment, retailer success is driven by forecasting accuracy and flawless execution – winners will be those who effectively manage supply and demand, have margin discipline and use selective activation, as well as protecting themselves from supply chain shocks and cyber-attacks.

Q2 is about getting operationally ready for selective demand, not assuming a broad recovery.

Miya Knights

RTT Technology Analyst

Workforce pressures continue for retailers

Key to the wider macro story, are rising employment costs, accelerating AI adoption and uneven unemployment shaping both costs and consumer confidence. This is a board level issue, with 84% of CFOs citing labour market conditions and employment costs as a top concern⁹.

Headline unemployment remains flat at 5.2%, but wage pressures persist across retail, hospitality and logistics with a 4.1% increase in the National Living Wage from 1 April and the implementation of the Employment Rights Act in February, materially raising the cost of employing people — particularly in entry-level roles.

AI Workforce

Rising labour costs are creating the business case to accelerate automation and AI adoption, with some businesses reducing headcount primarily through lower recruitment. However, job losses attributed to AI are often overstated: many retailers would have limited hiring due to weak economic conditions and cost pressure. Historically, technology has reshaped rather than reduced employment, often in ways that are not immediately visible, as well as added jobs that were not imagined before.

For many retailers AI is proving effective in customer interactions – whether personalised marketing, promotions or in handling customer contact – but beyond that many retailers are still working to scale and realise the benefits of AI. Those succeeding are leveraging AI to increase productivity through making people more effective in their time and their decisions, rather than replacing entire roles; perhaps with some process roles an exception to that.

Linda Ellett

RTT Chair and Head of Retail for KPMG

For retailers, as for many businesses, a key constraint in realising value from AI adoption is that skills gaps remain wide (c-230,000 in total with 33% relating to digital skills)¹⁰. Many employees are worried about their jobs or see technology as difficult; AI adoption requires investment in learning and cultural curiosity; but tight budgets often lack what is needed for the full change programmes needed.

Therefore, retailers will not be able to hire their way out of the AI skills gap; instead, winners will be those that reskill existing teams and treat AI as a workforce operating model change.

Over time, this evolution suggests that spending power is likely to be maintained, as the workforce adapts rather than structurally shrinks.

Unemployment affects sales as well

Unemployment pressures are unevenly distributed. Youth unemployment is materially higher (14.5% for 16–24s), while core spending age groups (35–49) continue to experience low unemployment (3.2%)¹¹. As a result, the direct demand impact for food retailers might be limited in the near term, where hospitality and discretionary categories will see impact coming through.

More significant is the confidence effect: awareness of job losses – even among those not directly affected—heightens insecurity across age groups and further dampens discretionary spending. That tends to mean fewer big-ticket purchases (Pulse: 47% of consumers have made no big-ticket purchases so far in 2026), while spend is relatively more resilient in treat and experience categories such as health & beauty and holidays⁶.

This workforce uncertainty feeds directly into higher savings rates, increased value-seeking behaviour and greater use of second-hand platforms, disproportionately affecting non-food retail and midmarket propositions. In more adverse scenarios – such as sustained higher oil prices – general unemployment, is likely to rise, creating a policy dilemma where inflation pressure argues against interest rate cuts, while a weakening labour market would normally justify lower interest rates.

Finally, the RTT noted the long-term implications of regulations, AI and economic conditions reducing employment. Retail and hospitality have historically been critical entry points for young workers. If these opportunities diminish, the impact extends well beyond the sector, risking fewer people gaining foundational workplace skills and long-term scarring of the labour force, with broader economic and social consequences.

What should retailers do? Right now, focus on resilience of operations, without losing sight of the customer.

Hear from our RTT members

Recent events in the Gulf have fundamentally altered the outlook for the UK economy generally and also specifically for the retail sector. Although the outlook before was lacklustre, most indicators were pointing in the right direction and some quite modest growth in household spending was seen to be likely. Although exactly how events will unfold remains very unclear, the impact of disruptions to shipping flows in the Strait of Hormuz is both widespread and will have a negative impact on expenditure and growth, whatever the final outcome.

The main transmission channel to the economy is through higher inflation. We have assumed that oil prices remain over $100 per barrel throughout Q2. Petrol prices and wholesale gas prices have already risen sharply, although much of the impact on UK households will not happen until the Ofgem energy price cap is raised in July. CPI inflation is expected to reach a peak of over 4% in Q3. In these circumstances, we no longer expect the Bank of England to loosen monetary policy by cutting rates. An increase cannot be ruled out, but only if there are signs of higher inflation taking hold.

We expect this rise in inflation to result in a pronounced slowdown in activity growth. Higher fuel and energy costs, as well as the upward pressure these will have on other prices, point to a greater squeeze on real household incomes. Corporate profitability, already at very low levels, will also be squeezed further, suggesting more downward pressure on capital spending. At the moment, some very muted growth in spending remains likely. But if the conflict persists and causes a further spike in energy costs towards $140 a barrel, recessionary conditions will be on the cards.

In food retailing, Q1 ended stronger than it began, with value growth at the Grocery Multiples of +3.6% but still with unit growth decline of –0.3% (NIQ Scantrack). The improvement was helped by an uplift in sales at the end of March ahead of the earlier Easter than last year and better weather, following particularly weak trading in the wet months of January and February.

E‑commerce remains the fastest‑growing channel in 2026 (+9%). In contrast, the wider Convenience channel which accounts for 22% of all FMCG sales, continues to show little to no growth as shoppers redirect spending toward Discounters and Online. Out‑of‑home consumption across hospitality channels and categories was also subdued (NIQ CGA).

Looking ahead to Q2, there are three challenges on the horizon.

Shopper sentiment remains weak: one-third of shoppers are changing their behaviours to save money, rising to 58% among those severely impacted by the cost of living (NIQ Homescan). So, there is a risk that shoppers tighten budgets further if, as expected, food inflation ticks up.

In addition, the industry is increasingly concerned about the combined pressures of rising energy costs and softening consumer demand going into Q2.

And whilst the start of FIFA World Cup in June will provide a short-term boost for food retailing, pubs, and some restaurants, this will be tempered by tough comparatives versus last year’s exceptionally warm June, when supermarket value growth ran at mid-single digits for several weeks into early July.

All of which means that sustained positive unit growth in Q2 appears unlikely.

The RTT view that we might have to get used to only around 1% Retail Sales growth (as judged by the BRC-KPMG survey, the most reliable guide to Retail spending trends) was based on Food sales growth slowing to ‘only’ around 2.5% and Non-Food sales staying broadly flat.

In terms of Q1, January was surprisingly good, with total sales up by 2.7%, thanks to a strong start to the month and the New Year Sales period. February was disappointing, however, with total sales only up by 1.1%, with activity dampened down by the very wet weather. The key month of March was overshadowed by the war in the Middle East and the surge in energy prices, but High Street spending in the first half of the month was artificially boosted by the earlier fall of Mother’s Day, as Easter was two weeks earlier than last year.

The earlier Easter means that March and April will need to be taken together, to get a fair impression of underlying trading (particularly for Food retailers), but the City’s immediate reaction to the war in the Middle East was instructive. The first two weeks of the war in March saw Food Retail share prices edge up a little (Tesco was up 2%), given the defensive strengths of the sector in uncertain times, but General Retail share prices sold off heavily, with interest-rate sensitive businesses particularly badly hit (Kingfisher was off by 17%, Dunelm was down by 14% and Currys fell by 10%, for example).

Looking into Q2, any upward pressure on interest rates would be very unhelpful to Government borrowing costs, given the impact on bond yields, and would also unnerve consumers already worried by the rise in unemployment and the subdued state of the housing market. The end of Q2 may get a boost from the World Cup in the US, all other things being equal, and a rise in food price inflation could lift top-line Food sales growth, but the outlook for discretionary Non-Food spending is challenging. As we move into Q3, 1% overall Retail sales growth might start to look like a good outcome.

Q1 performance was more structural change than temporary volatility. January’s lift was narrow and promotion-driven, with pockets of growth (artwork, antiques and online jewellery) rather than a broad-based consumer rebound. February quickly exposed how cautious and value-led shoppers remain (BRC: total sales +1.1% YoY; footfall ‑4.7%).

With the 2026 World Cup running 11 June–19 July, some uplift lands in Q2, so retailers should treat it as a preparation and activation quarter: focusing on inventory readiness, event-led missions, and targeted promotions. Q2 is about getting operationally ready for selective demand, not assuming a broad recovery.

When it comes to AI in the workforce, the biggest constraint is capability. Retail won’t hire its way out of AI skills gaps; it has to reskill its way through it. Wholesale and retail has one of the highest skills-gap densities (5.3%), with around 230,600 skills gaps – with digital, leadership and customer-facing skills all material parts of that gap (UK Employer Skills Survey). This matters because retail AI deployment depends less on hiring pure data scientists than on upgrading the capability of merchants, marketers, operators, managers and frontline teams to work with new systems.

The wider UK AI pipeline remains thin: government research finds 80% of businesses neither use AI nor plan to, and among those planning to adopt, 68% cite limited AI skills as a barrier. So, for retail, the outlook is clear: the demand for AI-enabled roles is rising faster than the sector's current training and organisational capacity. The winners are likely to be retailers that treat AI skills as a workforce redesign issue alongside automation, not just a recruitment issue.

Spending in retail slowed following the splurge in the sales at the beginning of the year, but the earlier Easter gave it a boost in March. Food, the essential spend, remains resilient, unlike non-food. Clothing in particular saw discounting prevalent. The weather is a key factor for clothing as we move into summer, and retailers are up against strong boost to sales from good weather last year.

Consumer sentiment is a major factor in spending and consumers were gloomy about the outlook for the economy even before the war in Iran erupted. The impact of increased fuel prices has an immediate effect on household expenses, and the constant forecasts about inflation and interest rate rises will dampen our outlook further. Moreover, the news that our holidays, the much-anticipated break for households, could be impacted due to a shortage of jet fuel, along with the problems travellers experienced when the war started, will concern those planning holidays abroad.

Coverage of the rise in unemployment to 5.2%, the highest since January 2021, and the prospect of AI taking yet more roles in the workplace, impacts sentiment further – especially for the poorest families and the 16-24 years olds, where unemployment is at 14.5%.

Those most likely to be at the family life stage, and the parents of these young people, the 35-49 year olds, and therefore the biggest spenders, account for 36% of the workforce and have a lower unemployment rate of 3.2%. Yet, while they may feel safer in their jobs than others, they will be concerned about the prospects for their children, and likely to be supporting them financially. This factor with the prospect of yet higher living expenses will be a further depressant on sentiment and spending in Q2.

Q1's 2.5% of growth (BRC) showed a broadly stable baseline but geopolitical uncertainty in the Middle East has added another layer of fragility, and as we head into Q2 the outlook feels increasingly constrained.

When uncertainty rises, consumers save, and our latest Consumer Pulse data shows 62% believe the UK economy is worsening. Almost half of those concerned are responding by cutting spending and 40% are deferring big‑ticket purchases. Yet with 47% able to spend freely day to day, and a further 33% with discretionary spending (albeit budgeted), there is spend to win – but it will be selective and hard-earned.

Even if the conflict eases, the consumer is also becoming harder to pin down: switching between price, speed, quality, sustainability and experience depending on their shopping mission that day. This fluidity makes capturing spend increasingly challenging. Those retailers telling us that sales held up in March also said repeatedly “but we had to work really hard for it”.

Some categories are better positioned to succeed in this environment. Health & beauty and Travel will continue to benefit from treat and experience-led spending, while food and other more functional categories face tougher trade-offs as consumers balance affordability, quality and trust.

Looking beyond Q2, continued economic volatility, supply shocks, cyber risk and climate disruption mean this isn’t just a near‑term challenge. The winners will be the most resilient retailers - those prepared for a multitude of futures.

Scenario planning is one of the most important no‑regret actions retailers can take now: actively testing extreme but plausible futures, from agent‑led purchasing to step‑changes in health‑driven consumption to sudden supply shocks.

Pair that with data-led decision-making, technology capability embedded across the business, and a deep, evolving understanding of the consumer, and you maximise your chances of winning whatever Q2 (and beyond) throws at you.