‘Retail to turn corner over next quarter’

The health of the retail sector could turn the corner over the next quarter, as improvements in personal finances is expected to boost households’ ability to spend, according to the KPMG Retail Health Sentiment Index.

Next three months could be a turning point where the sector will see a year-on-year improvement in retailer health, Retail Think Tank (RTT) believes. Consumers are expected to start feeling more confident around key drivers such as interest rates, price inflation and other household bills. The more positive year-on-year outlook for Q2 ‘24 comes in anticipation of headline inflation reaching the government’s 2 per cent target, and a hopefully exciting performance at Euro 2024, boosting food and drink sales, as well as football and sporting goods.

The RTT considers that whilst an interest rate cut potentially as early as June would help to settle consumer nerves, additional trigger events will be needed in order to move households to spending extra money rather than save it. Warmer weather and sporting events could deliver the necessary impact required to get consumers spending again. However, a spending boost is only likely to continue to buoy the food and drink sector, rather than non-food and big-ticket items which are expected to remain under pressure until the end of the year.

Linda Ellett, KPMG UK head of consumer, retail, leisure and Retail Think Tank member, “On the back of two years of budgeting and cost cutting, cautious consumers are releasing the purse-strings much more slowly than they tightened them, choosing to save or pay down debt. An early Easter helped end Q1 ‘24 with much stronger retail sales growth, but an early Easter does typically subdue April’s numbers by 5 per cent or more. Despite the economy still being challenging, how quickly food price inflation falls will be central to boosting consumer’s willingness to spend. It isn’t until the back half of this year that we would really expect consumer confidence and spending in non-food to gain the momentum needed to push the retail sector back on to a healthier path, but cautious steps in the next quarter will be most welcomed by the sector.”

James Sawley, head of retail & leisure, HSBC UK and Retail Think Tank member, “Economic fundamentals would have concluded that demand should have improved in Q1 ‘24 year on year, but trading data showed it was pretty neutral, not helped by generally miserable weather which kept shoppers at home. The economic conditions are improving, and retailers will be hoping that this is enough to start turning the tide on consumer confidence to the point where demand returns to the level needed to get the retail sector back on the road to good health again.”

Maureen Hinton, retail consultant and Retail Think Tank member, “Inflation and higher interest rates have made consumers much more selective with their spending, prioritising essentials, holidays and events, resulting in food retail far exceeding non-food. As inflation eases and discretionary income improves, volumes will begin to increase, offering more opportunities for retailers in non-food. However, product innovation is key to attract spend, as Zara continually proves and Nike has recently recognised. There will also be opportunities in home and electricals as the replacement cycle kicks in and the housing market improves.”

Mike Watkins, head of retailer and business insight NIQ UK and Retail Think Tank member, “We are seeing cautious optimism from consumers, and there is some light at the end of the tunnel as personal finance situations have started to shift to being more positive.

“However, the key question is whether consumers can be convinced to start spending again, particularly on non-food items and what triggers are needed to really make this happen soon. Retailers are already re-visiting cost reduction programmes in light of a rising cost base, so an uplift in demand is needed sooner rather than later to keep the sector moving towards better health overall.”

Miya Knights, Retail Technology Magazine publisher and consultant and Retail Think Tank member, “Those retailers that can effectively use tech to better match supply to demand, increase efficiency, and reduce the cost of goods sold, online particularly, will be best positioned to capitalise on any improvements in consumer demand in the months ahead.”

Charles Burton, director, Oxford Economics and Retail Think Tank member, “Wage inflation is falling more slowly than price inflation which is boosting post tax incomes and we are starting to see disposable household incomes rising quite quickly.  When interest rate cuts arrive we can expect people to really start feeling more confident to spend, but this is most likely something for retailers to look forward to in the latter half of the year.”

Nick Bubb, retailing consultant, Bubb Retail Consultancy Ltd and Retail Think Tank member, “Despite reassuring news on recent trading from the likes of B&M, both the General Retail and the Food Retail stock market sectors have been a bit subdued so far in 2024 (after performing well in 2023), implying that the City is not quite sure whether the widely expected high street spending recovery in H2 will materialise as expected.”