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A golden quarter lacking in shine: A look at Christmas trading results

Tuesday January 14, 2025

What next for UK retail?

October to December is supposed to be the retail sector’s ‘golden quarter’; that crucial end-of-year period where stores are at their busiest, sales usually peak and when many brands make a large proportion of their profits.

As figures have shown though, 2024’s festive trading failed to deliver. Indeed, while some categories such as beauty, jewellery and electronics performed well, the latest data from the British Retail Consortium (BRC) shows overall sales growth during this period of just 0.4%, compared to 2023. Once you factor in inflation, retail sales were actually down over the year, highlighting the very real pressure that many brands are under.

2025 is expected to continue to be challenging, and there will be several key issues that will continue to put pressure on the sector:

Rising costs

Retailers have already weathered sharp rises in the cost of doing business for some time, with inflation in everything from energy to staff wages. While inflation has certainly become more tempered, cost pressures are set to remain a key issue. In particular, brands will need to be prepared to shoulder higher costs stemming from new tax and statutory wage rises.

From April, the primary rate of employers’ National Insurance contributions (NICs) will increase from 13.8% to 15%, while the salary threshold at which employers start to pay NICs will decrease from £9,100 to £5,000. Meanwhile, the National Living Wage will increase by 6.7% to £12.21 per hour for anyone aged 21 and over, while the minimum wage will increase by 18% for 16-17 year olds and apprentices, and by 16.3% for 18-20 year olds.

Retail, as a sector, is likely to be particularly vulnerable to these changes – it relies on a large number of part-time staff to cover peak periods and employs a large number of young people. Although there will be some support for the smallest brands from a rise in the Employment Allowance from £5,000 to £10,500 per annum, the hit for others is expected to be significant – as much as £7 billion in additional costs, according to the BRC, when further changes to packaging taxes are taken into account. On top of this, Business Rate relief is also set to fall from 75% to 40%, which will further squeeze margins.

Weakening demand

At the same time, demand continues to be fragile. While it’s likely that consumer confidence will strengthen if interest rates continue to fall, any improvement is likely to be gradual. In the immediate term, forecast demand alone likely won’t be enough to drive profitability. While the BRC projects sales growth to average 1.2% in the coming 12 months, shop price inflation is forecast to be 1.8%, representing a real-term fall in sales.

Businesses in the ‘squeezed middle’– those that neither appeal to the value-focused shopper, nor those looking to pay for luxury – are likely to be particularly hard-hit by weak demand. They’ll have to work particularly hard to attract and retain customers.

Increased competition and changing market dynamics

Against this backdrop, competition for spend will be particularly fierce – and it’s clear that some retailers will struggle to find the capacity to compete. While brands may be under pressure to reduce prices, they may have limited room to do so given consumer demand and their own cost burden.

Likewise, others may find themselves left behind by shifts in consumer preferences for how and where they shop.

While the BRC found that total UK footfall fell by 2.2% year-on-year in December, it proved remarkably robust in retail parks and was unchanged on the same month in 2024. However, high street footfall was down 2.7% and shopping centre footfall dropped by 3.3%. If this trend continues, it will leave chains with significant presence in these locations increasingly exposed.

The road ahead

With headwinds set to persist a while longer, it’s even more important that retail management teams are proactive when it comes to maintaining their resilience, and plan ahead for every outcome. This should include additional, forecasting, re-forecasting or cashflow modelling – anticipating any pinch points as far in advance as possible.
Firms should also be considering what they might need to do to manage cost exposure, and the impact of this on their long-term viability. Some retailers may need to review their pricing strategies, and it is imperative that they protect the value of their brand as they look to safeguard their margins – excessive discounting can have the effect of undermining demand, rather than strengthening it.

Similarly, any moves like store closures can deliver immediate savings, but lead to losing competitive edge in key locations; something that will have long-term consequences. A careful assessment – with the support of an expert, but impartial, third party – will be important in arriving at these decisions.

As always, it’s important that businesses seek help at the very first signs of any distress. Challenging times needn’t end in negative outcomes and, from our experience, early intervention always maximises the chance of recovery.

Related team

Alastair Massey

Alastair Massey

Alastair Massey

  • Partner
  • Restructuring Advisory
  • London