Consumer goods and retail outlook 2023
Retailers respond to pricing pressures
The economic slowdown in China, caused in part by its zero-covid strategy, will mean fresh challenges for global luxury brands already affected by the loss of Chinese tourists. Inflation is hurting shoppers and shops alike. EU forecasts for 2023 show widening disparities between retail sales in nominal and real terms. Persistently high inflation will lead to 4.8% growth in global retail sales in nominal US dollar terms, but this headline rate is inflated by high prices. It masks slowing growth in real terms, lower purchasing power, and lower margins for retailers. However, there will be some pockets of real-term growth, mainly in middle-income countries in Asia and the Middle East. Online retail sales will grow by 6.1%, slower than in 2020-22, but their share of the total retail market will continue to increase.
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High inflation will squeeze profits...
With global inflation forecast at 6.4% in 2023 and demand flattening, retailers' profits will be squeezed in 2023. They will not only be challenged by higher costs for raw materials and logistics, but also by labor and energy costs. Retail wages have been rising faster than overall private-sector wages in many countries; wholesale electricity rates have also surged over the past year (especially in Europe).
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Some retailers will close stores, and the risk of retail bankruptcy will increase after a couple of years of respite. At maximum risk will be debt-laden non-food retailers, as lower consumer purchasing power will translate into lower discretionary spending. High energy costs, particularly for refrigerators, will also put some food retailers in Europe at risk. Moody's, a rating agency, recently downgraded the credit rating for Iceland, a UK grocer.
....and retail jobs
One way retailers will try to protect their bottom lines in 2023 is by slashing labor costs. Retail wage growth, which has been outpacing that of other sectors, will slow. Although we do not currently expect massive layoffs in the sector, increased pressures on retailers' margins will slow down new hires. Hopes of the sector's employment levels returning to pre-pandemic levels in 2023 are fading.
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Many retail chains will also invest in automating their backend processes, reducing their need for workers. By March 2023 Australian department chain Myer will deploy 200 autonomous mobile robots with the capacity to process seven out of ten online orders. Japan's Aeon will collaborate with British retailer Ocado to build an automated warehouse in Japan by 2023 to manage stocks and basket goods for online deliveries.
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Online retail growth will shift to developing markets
Online sales will continue to rise, with year-on-year growth of 6.1% taking their share of global retail sales to more than 14%, marginally exceeding the 13.9% share in 2022. However, sales growth will slow in China, the world's largest online retail market, as a result of its zero-covid policies as well as high youth unemployment, a weakening economy, and a government crackdown on technology companies. Meanwhile, the West will be wading through the cost-of-living crisis and a recession.
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A growing middle class, increasing internet penetration, and policy focus on digitalization will make many emerging markets attractive for retail investment. The Middle East and Africa and Latin America will see the fastest pace of growth in online sales in 2023, at over 20%, while Asia will report a 12% increase. Amazon, a US online retailer, plans to enter five new countries in 2023, with South Africa, Nigeria, and Colombia among the candidates. There will also be opportunities for marketplaces, logistics, and payment service providers to enable Asia's micro, small, and medium businesses, such as Indonesia's warungs, to go digital.
Inflation will push consumers away from hypermarkets to discount retailers in 2023
In a reversal of the pandemic-era trend, big-box stores and hypermarkets will lose market share to discount and convenience stores in 2023, as reduced purchasing power forces many middle-income consumers to trade down. In inflation-ridden European markets, a shift in this direction is already visible in the food retail market. Aldi, a German discount retailer, overtook Morrisons, a supermarket, in September 2022 to become the fourth-largest grocery retailer in the UK. In France, the largest discounts grocers-including Aldi and Lid|-have expanded their market shares over the past year.
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Similar trends are visible in other markets. Data from Placer.ai, which tracks retail footfall, shows that in July 2022 (when US consumer price inflation was up by 8.5%) discounters and dollar stores were the only retail category in the US to register growth in footfall. Meanwhile, two of the country's biggest retailers, Walmart and Target, registered declines. In South Korea, a surge in food prices is forcing many restaurant-goers to pick up cheaper ready-to-eat meals from convenience stores.
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Besides seeking lower price points, inflation-ridden consumers also tend to buy less but more often. This would make trips to out-of-town hypermarkets and big box stores more expensive as fuel prices remain high. Some hypermarkets will react by moving closer to consumers, setting up smaller "express" stores that can better compete with convenience stores. This will offer some opportunities for commercial real estate owners.
The economic slowdown in China will bring fresh challenges for luxury brands
The loss of Chinese tourists during the pandemic has been a blow to global luxury brands. However, their sales returned to pre-covid levels in 2021, helped by demand from domestic Chinese buyers. In 2022, China's zero-covid policies held back growth, although a rebound in Europe's tourism industry brought some compensation. However, 2023 will pose more challenges.
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China's consumer spending will be lackluster as the government maintains its zero-covid policy and a slowdown in important trade partners, such as the US and EU, weigh on the domestic economy. China's real-estate bubble, an important source of wealth for affluent Chinese, has been deflated by government crackdowns and covid-19. Youth unemployment remains high and will constrain demand from entry-level luxury buyers, an important customer base for luxury brands.
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Other markets will struggle to offset Asia's sluggishness. The region will account for nearly 18% of the world's high-net-worth population in 2023, with China contributing a third of the region's total. Kering, a French luxury giant, earns 34% of its revenue from the Asia-Pacific market, excluding Japan. Tourist spending in Europe, which has been a silver lining this year, may not offer as much support next year. Whereas pent-up demand has driven a tourism revival in 2022, growth in global tourist arrivals will slow significantly in 2023.
To watch
Plastic purge: Retailers will need to find other ways to package their goods in Spain, which will enforce a ban on plastic packaging for fruits and vegetables from January 2023 and (along with Italy) slap plastic taxes on non-reusable packaging. From July 2023 Dutch consumers will have to pay extra for single-use plastic cups and food packaging. Canada will expand its ban on making and importing single-use plastic products, due to come into effect by the end of 2022, by banning their sale from December 2023.
Green fashion: Spain's Inditex, the world's biggest fast-fashion company, aims to stop using single-use packaging by next year, as well opting for more sustainable fabrics. Zalando, a German online fashion retailer, aims to only sell brands that meet certain sustainability standards. Regulators will force the pace: Germany's supply-chain regulations, which demand that large companies vet for human rights and environmental violations, will pose a particular challenge for fashion retailers.
Better protection: Consumer brands and online sellers will face a stream of new privacy, competition, and data regulations in 2023. In January, Finland's Consumer Protection Act will force online sellers to offer more transparency into their pricing and discounting strategies. In the US, five states will roll out data-privacy laws that will affect the way that businesses collect and process consumer data. India plans to launch a revised data protection bill in early 2023. Businesses will need to recalibrate their data collection and storage methods to comply with new laws.
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Key risk scenario: Extreme weather fuels global food insecurity
The two regions most vulnerable to food insecurity in 2023 will be developing Asia and the Middle East and Africa. Countries in these regions are heavily dependent on food imports and quite exposed to climate vulnerabilities, and they also have limited scope for fiscal support. If weather conditions are even worse in 2023 than they were in 2022, an inability to afford or access food will lead to wider political and economic upheavals and increased poverty.
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A colder-than-expected winter in Europe could also have an impact on food production, especially if it is followed by another hot summer of drought. An escalation in the energy crisis would worsen the ongoing fertilizer crisis, further pushing up food prices in Europe. Production of fresh produce, especially foods requiring temperature-controlled environments, will be affected in colder countries. Mounting costs will push several mom-and-pop retailers and food service outlets out of business.
Source: The Economist (Intelligence Unit) – Industry Outlook 2023, 2022