At the start of March, Paul Martin (Global Retail Lead & UK Head of Retail at KPMG) kindly joined me for a video interview to talk about the trends of the UK retail sector since we last discussed the topic in early 2022. In this interview, Paul and I looked back at how the UK retail sector fared in 2022, amid a number of unique market challenges. We also discussed the main category movements witnessed so far in 2023, and provided a forecast for the next 12 months of trading!
Watch the full interview below:
Key Takeaways
2022 Recap:
- Following a positive 2021 Christmas period, 2022 started strongly for the UK retail sector, resulting in some of the best trading results KPMG had ever seen for January/ early February!
- A number of factors converging around February/March started to have a real impact on the sector. The Ukraine conflict had a big impact on the UK retail sector – initially in an indirect way (utility costs, and supply chains for key commodities).
- Over the course of the spring, and into the summer (coming out of lockdown restrictions). Consumers were spending and continued to do so up until September/October. Despite consumer sentiment being low, consumer spending was high all the way through to the Autumn of 2022.
- Summer 2022 – pent-up-demand that had accumulated over the last couple of years resulted in strong trading – people wanted to go out and socialise, re-arranged weddings, travel bookings soared to record numbers as the public made the most of the first extended period without lockdown in nearly 2 years!
- Autumn 2022 – colder weather, alongside credit card bills from summer spending and other economic factors, led to a reduction in consumer spending resulting in growth stagnation.
- Nov/Dec 2022 – Commentators feared the worst for Christmas period – but actual performance was a lot better than predicted! Many retailers posted double-digit sales growth.
Inflation:
- In Autumn 2021 KPMG predicted that inflation would continue to rise steadily, and would eventually hit double-digit levels. In the Autumn of 2022 this prediction came true!
- Inflation has since stuck at around the 10% mark. In some categories it has been higher – Food Grocery Inflation has been running at around 15% over the last couple of months (Dec 22 – Feb 23).
- A lot of the sales growth we saw in Nov/Dec/Jan 2022/23 has actually been driven by inflation!
- Paul suggests that volume sales is probably a more representative figure to consider in terms of growth – e.g. for Jan 2023 – Food Grocery Inflation was running at 16% but Volume Sales were DOWN by -6% – in other words – Consumers were spending 116% for 94% of product.
Key Category Movements:
- Food, Apparel, Lifestyle categories saw strong sales growth, most likely connected to the pent-up-demand of the public following lockdown restrictions over 2021/2022!
- Food/Groceries Category: has done very well, and is projected to keep performing well throughout 2023 – likely due to the fact that people’s discretionary income is now having to go towards more essentials like food. We’ve started to see fewer people eating out / ordering takeaways as well.
- Apparel Categories: Have also done very well – still seeing decent trading in the first 2 months of the 2023, but are now starting to slow – we are seeing consumers starting to be a lot more occasion focused on their spending in this space.
Consumer Behaviour & Sentiment:
- KPMG used the GFK Consumer Confidence Index to look at how consumer confidence and sentiment has fluctuated over the last year.
- Consumer confidence dropped to extremely low levels in the first 8/9 months of 2022. Despite this, consumer sentiment being low, consumer spending was high all the way through to the Autumn of 2022.
- Price and value is currently the most important aspect in Consumers minds – People are currently more likely to change products rather than retailer, to go for more value based goods instead of luxury items.
2023 Forecast & Advice:
- March/April/May: likely to be challenging – due to significant cost pressures faced by Consumers (Utility bill pressures + cost of living in general), hopefully picking back up again over Summer 2023.
- Macroeconomic indicators are projected to improve significant over the course of the year! Inflation expected to half by the end of the year.
- Key commodity prices are starting to drop back down to Pre-Ukraine conflict levels – this usually takes around 6/9 months for these price decreases to trickle down to consumer level, but the signs are encouraging!
- Consumer confidence will take time to improve – we typically see a 6-month time lag from negative consumer sentiment to economic crisis – and often a 12-month time lag for it to improve and come out the other side.
- We are expecting a shallow but fairly mild recession – The UK retail sector is expected to stay stagnant (mild-to-no growth) in 2023.
- If there is to be growth, we are expecting this in the Grocery sector – most likely with “value-first” retailers.
- Channel performance – online sales penetration back down to 28% – which is still significantly higher than pre-covid.
- Physical stores are still the preferred/dominant channel in UK retail.
- Retailers need to be channel agnostic but customers centric in relation to their overall sales growth strategy.
- Online vs Bricks – answer is still a combination of both (hybrid approach).
- Online channel is still expected to grow – but will peak out at around 35% penetration.
- Next fastest channel to grow is expected to be the “value” channel – retailers that are pushing price conscious offerings, which flows into consumer sentiment at the moment.
Key Themes of Focus for Retailers:
- Main three areas of focus: People, Planet, Profit!
- People: Due to the great resignation wave in retail following a difficult 2 years, retaining and attracting/developing talent in the retail industry has become pivotal. We are also seeing retailers focus on loyalty cards and connecting loyalty with savings for their customers.
- Planet: Sustainability continues to be a pivotal topic for retail – we are finding increasingly that consumers want to know that businesses stand for more – the onus is on retailers to communicate their sustainable practice effectively. Retailers also are increasingly looking at community links, as well as where they invest in regulation, especially regarding the ESG agenda.
- Profit: Retailers need to think about profit protection (cost and optimisation initiatives), growth (monetizing different parts of the business such as supply chain, technology, marketing capabilities), and Innovation (where will your business be in the next 5 years).
