‘We may be on the cusp of emerging from a final act of austerity’

It’s a challenging time to be a market forecaster in the retail sector. All the trusty data sources they would typically reach for would indicate rising trading temperatures while, despite last week’s Office for National Statistics (ONS) announcement of upbeat January fortunes, on the high street the mood remains decidedly cold. 

Real wages are back in growth, outstripping CPI in the fourth quarter of 2023 by 1.8%. The household savings ratio now sits above the 50-year average and consumer confidence has risen 10% since this time last year.

This should all mean consumers have more money in their pockets and more of a spring in their steps as they head to the shops.

But for many in retail, this improvement has coincided with a really challenging last six months, culminating in an anaemic reaction to Black Friday, a muted Christmas and a sluggish start to 2024.

Despite the ONS heralding a 3.4% rise in January sales, Revolut UK’s credit and debit card spending just released for January shows non-food retail spending is down more than 7% versus a year earlier (and down 15% on travel and restaurant spending). And “batten down the hatches” has become a recurring catchphrase around retail boardrooms.

Why the disconnect?

The signs were there through 2022 and the first half of 2023 that consumers were spending beyond their comfort levels.

Commentators in late 2022 were forecasting for a modest contraction of consumer expenditure in 2023, but the British Retail Consortium’s Retail Sales Monitor showed a 5% increase in total retail spending in the first six months.

That could be interpreted as a sign that consumers were spending more than they should, swallowing continued inflation and not offsetting it fully by cutting back in volume.

“With a slightly frivolous summer behind them, we have seen much more frugal consumer behaviour take hold”

Big-ticket spend continued to perform resiliently, we saw robust recovery in international holiday volumes and out-of-home entertaining and foodservice all came out of the blocks fast up to the summer.

Crude back-of-envelope maths would suggest that consumers spent £14bn more (around £500 per household) in this six-month period than forecasters were expecting given the macro-economic situation.

With a slightly frivolous summer behind them, we have seen much more frugal consumer behaviour take hold.

Non-food retail spending suffered an approximate 4% volume decline in the second half of the year, despite inflation falling.

When recently asked in one of our consumer surveys, more than 70% of consumers felt they needed to cut back on non-essential spend – explaining why fashion, decorative home and out-of-home entertainment bore the brunt of a tough autumn.

We also saw a different consumer reaction to Black Friday, using it more as an opportunity to spread the cost of Christmas than an additional opportunity to purchase. This clearly impacted the resulting December trade for a broad swathe of the sector.

The optimist in me believes that we are on the cusp of emerging from a final act of austerity in this consumer correction – a post-festive retail detox as the feeling of over-consumption still lingers well beyond the reality of their current financial stability.

So what happens now?

“Post January’s contraction, consumers have now nearly rebalanced their books after their previous over-consumption”

At the risk of just being another hopelessly inaccurate market forecaster, it points to light at the end of the tunnel in the not-too-distant future.

Using the same basic maths as cited above, post January’s contraction, consumers have now nearly rebalanced their books after their previous over-consumption.

We’ve also seen volume delay, rather than trade-down, fuel much of the recent slowdown and historically this has led to periods of more robust recovery.

Indeed, retail search traffic declines over the last six months illustrate that consumers were removing temptation from their lives, but with some green shoots that they are back browsing in the last few weeks.

With real wages looking set to rise and the seasons hopefully soon changing, there are reasons for a more optimistic spring.

The recovery will be gradual but, for many in retail, it will be a blessed relief to start unbattening the hatches.