According to the KPMG/RetailNext Retail Health Index (RHI), UK retailers are bracing themselves for a challenging start to the New Year. The report predicts a decline in consumer demand and spending during the early months of 2024, following the Christmas period. The main reasons cited for this anticipated decline are the increasing costs faced by consumers, such as rising mortgage and rental expenses.

Furthermore, the report highlights disappointing Christmas trading for some retailers, particularly in non-food categories. On the other hand, food retailers have been relying on promotions to drive sales. These factors contribute to a bleak outlook for the retail sector as it enters the new year.

The report concludes that consumers, burdened by financial strain, will further reduce their spending in early 2024. Despite having more disposable income compared to the previous year, thanks to reductions in National Insurance Contributions, wage growth outpacing inflation, and lower fuel bills, consumer sentiment remains low due to concerns about the struggling economy.

Paul Martin, the UK head of retail at advisory firm KPMG, notes that the lead-up to Christmas has been subdued, with indications that this year’s Christmas trading has been one of the worst since the pandemic began. Sales of non-essential goods have significantly declined and are expected to continue deteriorating as consumers tighten their budgets. The economic challenges are beginning to impact consumer resilience, and this trend is likely to persist until spring. However, there is hope that the situation may improve by April, although challenges such as increased minimum wage and business rates pose a threat to retailers’ profitability. Retailers are eagerly awaiting the budget announcement in March, hoping for positive news.

The report emphasizes that retailers have demonstrated remarkable resilience in recent years and are adept at adapting to economic shocks and changing consumer demands. While pressures on consumers from high inflation may be easing, the economy still faces challenges from the delayed impact of monetary policy tightening and rigid fiscal policy. Therefore, the retail sector is expected to remain stagnant for the next few months as it navigates through various shocks.

Independent retail analyst Nick Bubb highlights lackluster performance in Q4 of 2023, with volume pressure in non-food categories and indications of consumers tightening their belts. The report suggests that significant discounting has already taken place and expects this trend to continue after Christmas. The outlook for the retail sector largely depends on when the Bank of England decides to lower interest rates, which may relieve pressure on big-ticket spending. However, this is not expected to happen before the second half of 2024. The report also anticipates increased pressure on retail consolidation, with potential buyout deals and mergers becoming more prevalent.

Useful links:
KPMG Retail Insights
RetailNext Retail Health Index