KPMG/RetailNext Retail Think Tank Whitepaper: 2024 Outlook
This article is provided by BRC Associate Member KPMG.
__________________________
The KPMG/RetailNext Retail Think Tank predicts a tough 2024 for UK retail, urging innovation and efficiency for growth.
At the latest meeting of the KPMG/RetailNext Retail Think Tank (RTT), members shared their predictions and insight for the year ahead in the RTT 2024 outlook.
The bad news
Beset by low to no growth in the economy, customers impacted by a cost of living crisis, a recruitment dilemma, high staff costs, political uncertainty and a trading landscape changed permanently by the pandemic, UK retail had a tough 2023.
On top of all this, the continued impact of longer-term trends around channel fragmentation, changed consumer behaviours and decaying trust in institutions created further pressures which will spill over into 2024.
The RTT members predict that 2024 will be another lacklustre year, one of stagnation with many retailers simply getting by, particularly in the first half. And, as consumers come out of a Christmas, even with some good news at the tail end, this will see shoppers retreat into very tight budgeting from January onwards. It is expected that the UK retail sector will likely continue to see significant downward pressures on demand, cost and margin for the foreseeable future with a potential low-point being reached in May 2024.
Charles Burton, Director at Oxford Economics, said: “We think three key themes will shape the outlook next year, with the economy treading water as it moves from dealing with one shock to another. While the inflation shock is receding, both fiscal and monetary policy will hold the economy back in 2024. The Government has little room for manoeuvre on tax cuts and with more borrowers being forced to refinance their mortgages at much higher rates, the impact of past monetary tightening will continue to build. There is light at the end of the tunnel, however, as real wages should continue to recover in 2024 and as interest rates start to fall in the latter part of the year.”
Surviving the economic, geopolitical and technological disruption of recent years has instilled a strong sense of resilience within the sector. Retailers have not only acclimated to volatility and uncertainty, but many have actually benefited from newfound operational agility born out of these circumstances.
—Natalie Berg, Retail Analyst and Founder, NBK Retail
The good news
To quote Paul Martin, UK Head of Retail for KPMG: “Even if the economic outlook remains muted, one thing history teaches us is that following a downturn we often experience an upturn, and the question should be, are you doing everything now to prepare for this?”
So, there are grounds for optimism, particularly for those retailers that worked hard to confront all of their challenges, work that will in 2024 start to pay off, leading some to consider for the first time in three years the holy grail of growth.
Clues as to where that growth will come from in 2024 are everywhere, particularly in Grocery, and Health & Beauty. Other winners will be those able to meet the needs of consumers that increasingly shop across multiple channels, so single-channel or pure-play operators will find it more difficult to prosper and deliver a profitable return. Therefore, the future of retail is likely to focus on hybrid business models that seamlessly connect all channels and touchpoints.
New growth models, such as retail media – already strongly adopted by the likes of Tesco, Currys and Kingfisher - may already be paying off. And this will lead to other new ideas and further developments around: closed-loop (end to end) social commerce buying journeys; cross-border; hybrid marketplaces where retailers sell own brand and 3rd party goods; subscription retail; and platform business models adding 3rd party brands either directly owned or in partnerships, the likes of which have been so successfully demonstrated by NEXT and M&S, for example.
Retailers will be hoping for greater financial and political stability as a foundation for this growth, and with interest rates now potentially having hit their peak and a general election pending within the next 12 months, this is certainly achievable in 2024 for those that focused on innovation and efficiency in 2023.
What this means, observable in 2023, is an even stronger polarisation between winners and losers, between discounters and high-end retailers, between differentiators and ‘me-too’s, between essential and non-essential. The squeezed middle will face higher debt servicing costs, a loss of market share, possible acquisition by larger rivals or – ultimately – even extinction.
As retail consultant, Mauren Hinton, said: “Retail demand may be stabilising but costs are increasing, squeezing profits. Consumers, who are also dealing with higher costs, are remaining selective in their spending, so retailers will need to deliver compelling offers, backed by strong finances, to succeed in 2024.”
For consumers, Hinton continued: “Price inflation slowing down and higher earnings, coupled with a strong labour market, will help to offset some of the higher housing costs consumers are experiencing, mortgage rates and rental increases in particular.”
Takeaways
The RTT members all agreed, in a stagnant market, retailers need to go looking for growth and be ready for the recovery. With monetary and fiscal policy remaining a dead weight on the UK economy, the key challenges impacting retailers into 2024 are expected to be:
- Rising cost pressures, including National Living Wage and Business Rate rises
- Weakened consumer demand due to:
- Continued squeeze on households through higher interest rate mortgage refixing for homeowners
- Rising rent costs
- Wage growth slowing and its benefit to consumers offset as more move into higher tax brackets
- High household debt servicing costs
But, despite these challenges, there remains several growth opportunities in 2024:
- Exploring growth models, such as Retail Media Networks
- Adopting platform business models following the success of Next and M&S
- Reassessment of asset classes, such as Retail Park settings
- Investment in tech, including Gen AI
- Innovation across commercial functions and the supply chain
- Tapping into new growth cohorts of consumers and moving away from a Gen Z focus to acquire and retain older, more affluent consumers
- Category winners seeing Food, Health & Beauty and Purpose-driven retail outperforming other verticals.