The retail sector is braced for a difficult festive trading period as consumer confidence is impacted by economic uncertainty. Added to this, the cost-of-living crisis will likely cause consumers to make significant cutbacks to their seasonal spending.
Against this backdrop, we speak to Phil Reynolds, Partner in our Restructuring Advisory team, and retail expert and former CEO of Debenhams, Steven Cook, about the retail landscape.
Steven Cook: The current retail landscape is ever changing. Any leader at the helm of a retail business will be finding it challenging to forecast accurately for the coming quarter, given it is such a disruptive market. It is certainly the most volatile I have experienced in my career to date.
While some businesses at the upper end of the market are continuing to show a steady increase in sales, there remains a great deal of pressure on mid-sized businesses and the smaller end of the market.
The market is also facing considerable challenges from a pricing perspective. The impact of inflation has significantly increased the price of food and packaged goods, while imported apparel or footwear has been less affected, for example. Alongside this, return rates are skyrocketing for digital businesses, fuelled by the growth in online shopping, and more consumers choosing to return goods shortly after purchase.
Phil Reynolds: The level of current market uncertainty will inevitably affect forward planning in the retail industry. We’re seeing the impact of this in purchasing decisions for the spring/summer clothing collections, for instance, as retailers are rightly cautious to forward-buy when pressures on the supply chain and logistics are squeezing hard.
Looking at the economic headwinds, consumer confidence remained high until late summer this year, almost defying gravity. But sentiment is now at a real low and the impact of the Autumn Statement has hit hard, with tax rises and spending cuts set to take their toll. The latest Purchasers Managers Index is showing pressure and we’re starting to see the impact on this on capital expenditure investment appetite as well.
Steven Cook: In the current market, consumers are buying less and spending much more thoughtfully. The market is being further impacted by increased caution that retailers do not always face in a regular consumer-centric Christmas season.
Steven Cook: Retailers that operate in niche sectors, or those with more luxury price points, are typically performing strongly, with sales continuing to rise. There’s always a customer for luxury goods, but with pending issues linked to international tourism being scaled back and geopolitical headwinds continuing to gather, pressures could be mounting in this space too.
The decision to reverse the VAT rebate is particularly difficult for tourism, as wealthy international visitors are no longer attracted by VAT-free shopping. For the UK’s luxury retail market this is a significant development, as typically only a small portion of their customer base is UK-centric.
Entry-level retailers are also facing notable challenges. Consumers will still spend on food, for example, but they will likely be more selective on what they purchase.
Phil Reynolds: It will be interesting to see what happens on the sales of big-ticket goods too. House-buying is a major driver for the sale of kitchens, bathrooms and carpets for example and the changes to stamp duty are unlikely to counteract the impact of interest rates. The impact of inflation outstripping wage growth is also likely to have impact on other big ticket discretionary items like cars.