Written by: Susannah Streeter | Hargreaves Lansdown
- Falling inflation will ease pressures but cost-of-living headwinds to stay
- Store closures are set to stay headline news
- Hybrid approach set to give online only a run for its money
- Big brand power set to continue to dominate.
- China fragility set to weigh on luxury giants.
- Big grocers likely to show continued resilience.
- Shoplifting threats set to continue amid automation drive.
When the going gets tough, we buy less stuff or downgrade to cheaper alternatives. That’s the reality many retailers are set to grapple with through 2024. This is showing already in the run up to Christmas, with shoppers keen for sweet treats showing signs of trading down from luxury chocs to competitive offerings from Nestle and Cadbury owner Mondelez. The shiny wrappings of Quality Street are proving a bigger draw this year, with shoppers lured by promotional pricing.
Looking ahead, inflation is expected to continue to fall but prices will still be rising, albeit at a slower pace. So, the squeeze on household budgets is set to continue. Wage growth has headed above and cuts to National Insurance are coming through in January. This should help alleviate some pressures on demand, but household energy bills are set to rise in January, so consumers won’t have much more wiggle room to splash the cash.
While the profitability of the retail sector is stabilising, consumer budgets will remain squeezed and the sector is super-competitive, so margins for non-food retailers are set to stay under the cosh. The latest ONS data comparing spending from the end of 2021 to the summer of 2023 has shown that as cost-of-living pressures have spiked, discretionary spending on goods which we would like but don’t’ necessarily need has fallen back. That trend appears to have accelerated as lockdown savings have continued to dwindle.
Store closures are set to stay headline news
As the era of cheap money has hurtled to an end, retailers relying on cheap financing are likely to face a precarious 2024, if they need to roll over loans. Many stores in town and city centres could be faced with a triple whammy of the cost-of-living crisis, hybrid working limiting footfall and higher borrowing costs. It’s not a surprise that there are predictions of another wave of shop closures across the UK. The Local Data Company, which crunches the numbers on retail outlets, is forecasting that there will be between 8,000 and 15,000 fewer stores by the start of 2025. Clamour for local authorities and national governments to launch incentivisation strategies for regeneration are set to continue.
Hybrid approach set to give online only a run for its money
Amazon has seen some serious profit erosion in the last few years after overspending and underdelivering on the retail side, so there is a lot riding on its festive season results early in 2024. The early signs look promising for the king of e-commerce with a whopping 88% of consumers are expected to make a purchase on the platform during the festive period. But not all online retailers can boast the huge clout of Amazon and others, particularly apparel retailers are likely to continue to struggle as hybrid approaches dominate the retail sector.
Although online shopping is now firmly ingrained as a habit for the long-term, shoppers still clearly want the in-store experience and e-commerce retailers are likely to continue to have a tougher time, particularly as competition for shoppers’ wallets heats up amid the cost-of-living crisis.
ASOS and Boohoo were the e-commerce stars of the pandemic, but they’ve been frozen out of the limelight as shoppers have pinged back into shops to try before they buy without the hassle of multiple returns. An agile social media presence is crucial in the hybrid retail world, a skill Primark has long recognised. Now Primark is brushing up its hybrid credentials and has joined the click and collect party, its resistance to online batted away, as e-commerce stays a crucial revenue stream for its rivals. UK fast fashion names are also facing tough competition from Chinese firms Shein and Temu. They are aggressively expanding across the world, offering super-cheap fashions which are highly tempting for cash-strapped consumers. These fast fashion rivals pumping ads into social media and using referral schemes to hook in shoppers are unhampered by high rents and business rates. Shoppers with scruples and steady disposable incomes may be able to resist their cheap charms, but people desperate to find bargains amid cost-of-living pain are likely to be seduced.
Big brand power set to continue to dominate
Although consumers are being much more discerning over where to splash their more limited cash, big brands are still a super-powerful force. JD Sports Fashion is benefitting from this trend and it’s not just teenage pestering that keeps revenues rolling in, as wearing the latest sneakers and trending athleisurewear now appears to be a priority for all ages. The global sports apparel market is huge – valued at $196bn in 2022 and expected to grow to $272 billion by 2030. To service all this demand JD Sports is rolling out stores all over the world, with upwards of 200 more expected this financial year. The group’s sales mix by region is much better balanced than its biggest competitors, which helps smooth out bumps in the road if one market slows and because the group sits at the premium end of the market, it typically has healthier margins than its peers too. However, if conditions deteriorate and consumers begin to feel more of the pinch, it could still feel more pain that others given its position in the discretionary goods sector.
China fragility set to weigh on luxury giants
China has been the engine of growth for luxury brands so signs of weakness across the vast economy have sent chill winds whistling through the sector and there is little data to indicate that the situation is going to change markedly in the early months of 2024. The share prices of LVMH and Burberry have been hit by worries about Chinese consumers tightening their belts as confidence remains low and the fragile housing market affects perceptions of wealth. Concerns are swirling not just about domestic spend but also the appetite of Chinese travellers to splash out in high end boutiques around the world. Although core customers do usually have wealthy layers of protection from slowdowns, buying a luxury item is not likely to be top of the list amid scenes of humanitarian crisis, so the conflict in the Middle East won’t help sales either. In the US as well, Burberry sales have been dipping back quite markedly as domestic shoppers have pulled back on spending. This is likely to be down to lockdown savings dwindling fast.
Big grocers likely to show continued resilience
Smaller supermarket chains, like Iceland, without the clout of mega purchasing power and deep supplier networks, are likely to continue to feel the pain of cost inflation, although it is subsiding. But super-large grocers, particularly Tesco, is set to continue to show muscle, thanks to its vast footprint, it web of suppliers, deep diversification and strong value offering. Grocers are showing their hardiness amid the ongoing cost-of-living crisis given that they sell the non-negotiables that people can't do without. Tesco’s strategy relies on being able to offer better all-round pricing than the competition, and its delivered remarkably well on that. But the discounters Aldi and Lidl are set to keep nabbing shoppers from bigger names and are a threat that can’t be ignored.
Sainsbury’s will be keeping a keen eye trained on this nimble competition. Although it’s been putting up a good fight in the battle for footfall particularly through its Nectar price promotions, offering value doesn't come cheap and it’s putting a firm ceiling on margins. 2024 should relieve some pressure but it’s still set to be a pretty tough road ahead. Going into 2024, there will be a watch on the results of the CMA’s investigation into the use of loyalty card promotions, amid concerns that they make prices less transparent. Given the success of Tesco and Sainsbury’s in attracting customers through these schemes, any curtailment of promotions could potentially drag on market share.
Marks and Spencer set to stay insulated
Marks and Spencer has shown prowess in its food business without the two-tier system of loyalty card prices. Volume growth has outpaced all other mainstream food retailers in the last six months, despite the fact that many of its products are priced towards the higher end. The clothing division is also a growing and increasingly powerful string to its bow with sales having staged a remarkable turnaround. The retailer’s strategy of closing larger underperforming department stores and concentrating on outlets in more popular retail parks is paying off.
Just as many companies found it impossible to compete without an e-commerce arm during the pandemic, now bricks and mortar operations are proving equally essential. They key is choosing the best pick and mix approach to physical and virtual shopping environments. Growing sales also show the extent to which the company has regained some of its style credentials. Profitability in the division has also spiked as full-price sales made up a bigger share of the mix. Marks and Spencer shoppers appear more insulated from the cost-of-living headwinds, which have slammed people needing to remortgage or pay higher rents. It’s bread and butter customers are more likely to have paid off their mortgage and so have higher disposable incomes, which is partly why the chain is showing such resilience, which is likely to continue into 2024. The challenge will be to attract younger customers but here the company’s strategy of offering homeware and clothing to suit varied price points and styles should pay off in attracting different generations. Life is slightly less rosy when it comes to the M&S joint venture with Ocado, and although we may not see significant progress in 2024, management’s track record of turnarounds does bode well for the 3–5-year plan to boost its fortunes.
Shoplifting threats continue amid automation drive
UK retailers are expected to continue to limiting capital expenditure with investment set to stay channelled into automation in warehouses and stores. But this could be end up exacerbating the shoplifting crisis. As consumers have been buying fewer items, thieves have been making off with more and this trend looks to continue into 2024.
Stores are battling a rising tide of shoplifting amid the cost-of-living crisis. The British Retail Consortium estimated the crimes would cost retailers just under £1 billion pounds in 2023, with little set to change the situation going into next year. We are likely to see more store using technological innovations to cut down on costs and stop margin erosion but this trend risks leading more shoppers into temptation.
It’s not a coincidence that the rise in shoplifting comes amid the spread of self-scan tills in stores, with fewer staff on hand to spot shoplifters. The proliferation of security tags on items and padlocks on in-store fridges is unlikely to be enough to deter thieves from slipping unscanned items into bags, or brazenly running out with stolen stashes. As more self-scan machines are introduced, other tech is increasingly being brought in to monitor our behaviour and we are likely to see an increased use of AI for facial scanning to try and spot repeat offenders.
Related: 3 Funds To Watch for 2024