by Gary Whittemore, EMEA Head of Sales at RetailNext and Retail Think Tank (RTT) Co-chair
UK retail had a challenging 2023 – beset by low to no growth in the economy, customers impacted by a cost-of-living crisis, a recruitment dilemma, high staff costs, political uncertainty and a trading landscape changed permanently by the pandemic. Because we see most of these dynamics still in play, the RTT’s latest whitepaper predicts that 2024 will be another lacklustre year, one of stagnation with many retailers simply getting by, particularly in the first half. While Christmas always delivers some good news, however late that comes, we expect shoppers in the new year will retreat into very tight budgeting from January onwards.
As a result, our figures show that the UK retail sector will likely continue to see significant downward pressures on demand, cost and margin for the foreseeable future with a potential low point being reached in May 2024.
The experts on our panel reported an increase in business administrations in 2023, but now predict fewer failures for this year, even while the going remains tough for small family run businesses, SMEs and independent retailers. Most vulnerable are those with high debt servicing on any loans, to which we must add many online retailers dealing with a more competitive market and higher operational costs.
However, there are grounds for optimism. This is particularly true for those retailers that worked hard to confront their challenges in 2023, and we think this will pay off in. Some may even be in a position to consider for the first time in three years the holy grail of growth.
The growth sectors are predicted to be grocery, health and beauty Grocery and Health & Beauty, which performed strongly in 2023. General Merchandise, Discount and Purpose-led Retail will also see growth. “Bigger ticket” categories, such as Furniture, Homewares and Electricals will not perform well, unless they are the leaders in their category. Apparel will also stagnate, particularly mid-market Luxury.
The likely winners in any sector will be those retailers that can address the needs of consumers across multiple channels, so single-channel or pure-play operators will find it more difficult to prosper and deliver a profitable return. Therefore, the future of retail is likely to focus on hybrid business models that seamlessly connect all channels and touchpoints.
Each channel though will still have to work hard, particularly stores that are coming to terms with fewer visitors and having to recognise their contribution to sales and loyalty through every other channel. To do this, retailers need both macro- and micro-demographic data and insight.
Looking at the changing demographics in Europe is the place to start. Older and more affluent people are less likely to have mortgages and therefore higher disposable income, so retailers that play to this base will outperform. The squeezed middle who have had to refix their mortgages to a higher rate will be a less rewarding demographic, while at the lower end, the discounters that offer the keenest prices will also outperform in 2024.
Understanding and acting on customer behaviour in every channel is a key differentiator for retailers hoping to reach consumers operating on very tight budgets. So, in micro terms, granular customer data will be the essential fuel driving sales and loyalty in 2024.
What this means for consumers is, the static, one-dimensional experiences they are used to now will become more immersive, predictive and tailored to meet their individual needs. The key enabler to building hyper-personalisation will be Generative AI. Retailers will open and close stores next year, as they have always done, now they will be able to make better choices based on a better understanding of how their customers shop and then what channels and apps they use to make a purchase.
Store data will eventually provide retailers with a 360 degree view of customer traffic and behaviour so they can improve general store operations, build more responsive merchandising, cut areas of inefficiency and modify store design. AI will also be used for smart forecasting on replenishment, pricing and promotions, as well as automatic alerts for markdowns to reduce waste. In this way, the store not only performs better on its own terms but also supports the customer journey in every other channel.
Early Christmas 2023 trading results have so far been very positive and with inflation now starting to fall further, there are many reasons to be cheerful about the prospects for the sector this year, even while there are still challenges ahead.