The Retail Think Tank

Retail health was largely unchanged in Q2, with weaker growth in non-food retail offset by modest growth in food retail. While some sales did increase, growth was largely driven by price rather than volume as the expected cost increases from NIC and wages fed through. The current storm of headwinds continues to undermine consumer confidence about the UK economy.

Food sales rose in retail by just over 4% but slightly less in out of home channels [1] thanks to food price inflation which increased to 4.4% in the 12 months to May 2025, up from 3.4% in April [2]. Actual volumes sold in supermarkets went down by 0.5% over May and June [3].

Pressure on non-food sales began to show. HSBC reported that UK non-food sales dropped 2.6% year-on-year in the first five months of 2025 [4]. James Sawley, our RTT Retail Banker also reports an increase in the number of Retail customers showing signs of financial distress.

Online sales suffered a 3% drop in May - the first year-on-year decline in over a year [5]. Online fashion is down 4.5%, and online homeware is down 11% [6].

However, it’s not all doom and gloom. Technology sales are back in growth thanks to the replacement cycle 5 years after the Covid pandemic continuing and home, seasonal and DIY were up by over 2% in Q2 boosted by the sunny weather [7].

Consumers have more money in their pockets as we continue to see wages outstrip inflation - with real wage growth sitting around 1.5% in April 2025 [8].

Consumers are feeling more financially secure - over half are spending freely day-to-day, and half of people are still concerned about UK economy, [9] and are managing budgets carefully.

The government’s move to freeze tax thresholds and allowances as part of their effort to balance the books is quietly eating into gains. So even with wage growth, over half of people aren’t necessarily feeling richer [10].

Interest rates have been held in June, but another two interest rate cuts are expected by year-end, bringing interest rates down to 3.75% [11]. This is positive news for retailers, as it should encourage spending rather than saving. However, with many homeowners locked into fixed-rate mortgages for another year, the benefits may take time to show.

As a result of these factors, the RTT predicts a continued tight consumer management to spend in Q3 and the remainder of 2025. As a result, insipid growth in household spending and retail growth is expected [11].

So, what can brands and retailers do to win?

Food sales

Food retail is set to keep gaining share from out of home as price conscious consumers make swaps and dine in at home, buying premium food from supermarkets. Although when people do choose to eat and drink out of home, they will continue to pick drinks over food.

Health and wellness are still top of mind with 66% of UK shoppers actively making choices to improve their health and wellness [13] and low/no alcohol sales at supermarkets are growing ahead of the overall market. And as for weight loss drugs, there is currently speculation around the impact they may have on food purchases, but there is not yet conclusive evidence.

The way people do their food shopping is changing – over half of all shopping trips are either for "dinner tonight or a treat today"; is the big weekly food shop going to be confined to history sometime? How will this more in the moment spending manifest in how customers shop for their Christmas food and drink this year.

Non-food sales

Non-food retail will continue to face headwinds in Q3. The sale of WHSmith and Poundland as well as store closures at River Island are clear signs of pressure in this space.

Shoppers can be fickle and are cost-savvy, so even when retailers successfully attract them through promotions, loyalty is short-lived.

The great British weather, especially compared to last year, should help fashion retail in Q3. But could strong summer holiday fashion sales have been brought forward by the early sunshine?

Continued strength is anticipated in electronics, beauty and travel [9] Electronics in particular are now seen as essential items and with autumn around the corner, we’re expecting a further short-term boost as people gear up for the "back-to-school" season. Athleisure continues to be a strong area within clothing; selling what young people want, and the good weather is only amplifying that as people head outdoors for activities.

Chinese giants continue to disrupt the fashion industry with HSBC Card spend data showing demand for Chinese ecommerce is growing some 35% YOY - a serious shift in the retail landscape [4].

Retailers are feeling the continued bite of NIC and wage increases which is expected to cost retailers an additional £5 billion in 2025/26 [14].

At the same time, the job market is shifting. Unemployment hit a four-year high in May 2025 and vacancies have fallen by over 15%, [15] reducing consumer confidence but easing the pressure on wage growth.

Tariffs

A 10% tariff has been imposed by the US on all countries, including the UK, as of 5th April 2025. Whilst this is now part of a formal trade deal, it’s a deterioration on the previous position where there was no tariff. However, despite the media headlines, our RTT economist predicts the actual impact of the tariff is limited as only 5% of UK goods are exported to the US.

The end of the ‘de minimus’ rule is increasing costs for Chinese retailers. Shein’s daily active users fell 25% after the ‘de minimis’ rule ended [16] and with tariffs at 30-40% Vogue says Shein have put prices up 20 – 75%.

Property

In terms of property costs, rent has remained relatively static, though there is evidence of rental growth in the strongest city centres and malls [17].

Service charges in shopping malls have steadily increased year on year, making some mall shop units comparatively less attractive than their high street counterparts in the same location.

Cybersecurity

Cyber threats are a growing concern given the recent cyber-attacks in retail. Over half of all businesses have experienced a cyber security breach in the past year (BRC), driving increased investment of time, money, and resources.

Retailers who best weather these threats are those who have run simulations and have developed the muscle to respond. No business can protect itself fully from an attack, but training and policies to minimise vulnerability, leadership simulations and strong partnerships at the ready, maximise the resilience.

Volume growth is becoming harder for retailers and we’re likely to see volumes stay stagnant, driven by the continued climb in prices. In terms of cost, September could be a tougher month, as by then, rising costs and food inflation will have really hit the industry. However, retailers should remain hopeful that the good weather will lift sales as consumers spend on out of home experiences, and so there is still hope for sales in Q3.

With the sale of Poundland for £1 and closing of 68 stores, as well as a change in CEO at B&M after reporting annual profits down 13% is there a ‘circle of life’ for the discounters?

That said, some are getting it right.

Specialist discounters across all categories - Aldi and Lidl in Food, Savers in Home & Beauty - are winning. Why? Because they’ve nailed a clear and differentiated proposition. Meanwhile, generalist discounters - the ones trying to sell “a bit of everything” - are struggling.

The winners understand that the consumer perception of value has changed – it doesn’t just mean cheap anymore. In fact, it’s now trendy to shop “cheap”, with a growing popularity of “middle non-food aisles” in supermarkets. Also, major supermarkets are increasingly using loyalty schemes to offer cheaper price-matched products to customers making it a more competitive environment.

Many discount retailers choose not to have a digital presence, which means they’re cutting themselves off from a huge chunk of potential customers. E-commerce and Q-commerce are growing fast, and younger shoppers are leading the rapid shift to online. Co-op plans to capture close to a third of the store-to-door, quick commerce market by 2027 [19]. And digital doesn’t just mean having a website, it’s also social commerce, AI and automation – tools that help retailers to grow and stay competitive. But with razor-thin margins, many discounters simply can’t afford to invest in the tech they need. 3 in 4 organisations plan to prioritise new tech investments [20] over upgrading existing systems in the next year - a clear signal of where the industry is heading.

Property costs are another challenge; where discounters are now seeing rent reviews increase their costs significantly. As a result, retailers are increasingly moving to a smaller store format as "show rooms" as opposed to big out of town shopping centres, which doesn’t work as well in the generalist discounter sector.

And whilst shoppers are still mindful of value, they’re not quite as strapped for cash as they were. Instead of visiting five different stores to find the cheapest deals, many are opting for convenience - places that offer both value and variety in one place. E-commerce is also evolving to meet this need. Amazon, for example, is now consolidating food and non-food items into same-day deliveries.

Today’s shoppers also crave newness. They will switch to the latest discounter without second thought unless they are offered new, differentiated products at their fingertips. Whereas the “middle aisle” used to be a treasure hunt—an exciting chance to stumble on a bargain. What once felt exciting is now just more stuff we don’t need, and consumers are starting to see through it. As shoppers become more mindful, they are asking themselves: “is it good for me or good for the planet?” when making purchasing decisions, signalling the rise of the cautious and conscious consumer.

And with the variety of low cost online retailers you can now get the same dopamine hit from “the middle aisle” in your pocket 24/7, so the competition for attention has never been fiercer.

So, whilst discounters will continue to be part of retail, the circle of life perhaps means that to not become part of the nostalgic memories of today’s shoppers (“I do miss a pick ‘n’ mix and CD visit to Woolworths”) discounters must work harder than ever to stay fresh, relevant and trusted as the best “value” offering for today’s consumers.

Presented by the Retail Think Tank