Challenges ahead but resilience shown during pandemic should provide confidence

Back in January there were some underlying challenges with supply chains and inflation was just coming through but the world looked pretty positive overall. Roll forward six months and things have taken a turn for the worse, with inflation having gone through the roof, the supply chain situation has been exacerbated by the lockdowns in China, and we also have the war in Ukraine adding to global uncertainty.

Against this backdrop let’s take a look at exactly what’s happening in the UK retail and wholesale market and seek to highlight some positive signs from which can be taken some elements of confidence for the future.

We’ve certainly seen consumers revert to some of their pre-pandemic behaviours with online sales now accounting for around 25% of the total retail market versus a peak of 36.8% during the lockdowns, although this is still some way above the 19% level of February 2020 before Covid-19 hit.

At the start of the year, online retail sales were c30% and the ongoing reduction that has led to June’s c25% is being driven by consumers returning to the high streets to shop around for better deals and also avoiding rising delivery/returns costs. The flexible business models many retailers developed through the pandemic, means that omni-channel retailers are well placed to support these changing buying behaviours.

Although footfall is stubbornly 15% below the pre-pandemic levels of April 2019 the higher sales now generated online arguably more than offsets this lesser figure for the high streets. There is also the hybrid-working factor, which will have reduced footfall and whose impact we have not yet fully seen. These changing shopping behaviours will prompt a reassessment of the role of stores as the likes of click & collect, and the ability to return unwanted online orders into stores, continue to grow in importance as they have been embraced by shoppers.

Primark is proof of the rise of click & collect and the necessity of retailers to provide a flexible way for consumers to shop across channels. There was an inevitability about this move but what is most interesting is that the company is not offering home delivery for online orders. It is only providing this fulfilment-from-store model, which it clearly regards as the most economically viable way to provide an online shopping service. It will be interesting to see how this pilot develops.

When considering the outlook for the retail sector there is no escaping the cost of living crisis that is severely impacting spending but we have also seen some transference of spend into other parts of the economy, noticeably leisure activities including holidays. In H1 22 leisure benefited from people who had accumulated savings during Covid-19 and were buying holidays and experiences. However, as household budgets are increasingly squeezed, we are starting to see Leisure activities being curtailed and digital subscriptions being cancelled for TV, Film & music services.

As an essential purchase food has remained more stable but the major grocers have experienced a shift away from people buying branded goods towards more competitively priced own-label ranges. For the larger grocers, own label products generate higher margins, which will no doubt help to offset the issue of lower average basket sizes as people become stricter with their grocery budgets.

Also somewhat insulated from the cost of living crisis are those retailers selling to a more affluent customer base. Watches of Switzerland and Burberry have recently posted strong trading results indicating that sales levels are being maintained. Higher disposable income levels, combined with hybrid working reducing the cost of commuting, has resulted in a continued willingness of these people to spend rather than save. This highlights the fact there is some obvious polarisation in the market at the moment.

There is also a similarly polarised dynamic emerging between retailers as they tackle the ongoing issue of ESG. For smaller operators it is more of a struggle to deliver on this as they deal with the onslaught of other pressures. But for larger retailers there is no side-lining ESG because it is not a short term issue. It will remain much longer than the cost of living crisis. Not only does the building of ethical supply chains and sustainable product ranges take ongoing investment and resources by large companies but there is also the reputational risk for these organisations from failing to commit to their stated ESG strategies.

The conclusion is that the next 12 months will be tough but ultimately consumers will still spend as they always have done during previous recessions. It’s therefore up to retailers to attract this spend and invest for the long-term. There is no doubt that it will be a rocky ride and that retailers need to strap themselves firmly in for this ongoing economic rollercoaster. But the resilience and adaptability they showed during the pandemic has given them the experience and confidence to weather the storm they face over the coming months.