Friday February 3, 2023
The past few weeks have seen a flurry of retail trading updates, with many brands posting strong revenues, and unveiling plans for new growth.
However, despite this growth – the latest ONS retail trading figures revealed that, while sales values rose in December, sales volumes fell for the ninth consecutive month.
It’s likely that any rises in consumer spending in the final months of 2022 were something of a ‘last hurrah.’ Consumer confidence remains weak and could be for some time to come.
While the latest CPI inflation figures published in January, indicated that inflation slowed marginally month-on-month (reducing from 10.7 per cent to 10.5), it is still nearly double the rate it was at the start of 2022.
Some inflationary headwinds are expected to ease as the year goes on. But price pressures will remain acute – and keep consumers’ finances under pressure.
This will be exacerbated if a trend of under-inflation pay offers continues into 2023. As a recent Financial Times analysis revealed, FTSE 100 companies handed their staff average pay increases of six per cent last year. This was barely above the 5.5 per cent inflation registered at the start of 2022, never mind the double figures that it hit at the end of the year.
Households’ budgetary headroom could also be given yet another knock if the Bank of England moves – as expected – to increase interest rates further in 2023. This will affect those with debt particularly, including the 1.4 million that are expected to need to re-mortgage at a higher rate when their fixed-rate deals end this year.
And then there’s the recession.
The Bank of England has indicated that this will be shallower and shorter than previously expected. But consumers will still have it front of mind as they review spending decisions, and may tighten their belts as a result.
All of these factors could mean reduced consumer spending. But that’s just a single dimension of the one-two punch that will be hitting the retail sector this year.
Businesses themselves will be battling operating cost inflation – driven by factors such as wage bills and energy costs. Taken together with lower demand, this will strip margins to the bone in some cases.
Retailers have been working hard to differentiate their offering to gain a competitive advantage – with Tesco’s acquisition of the Paperchase brand a recent example of just such a move.
However, some may find that these moves cannot be executed quicky enough – or deliver the boost brands may need. Where there are signs of distress, it is essential that management teams seek advice and support early. Those that do will be in the best position to take any corrective action.