‘Retailers are heading into a challenging period of adjustment post-Budget’

Just as retailers prepared for what promised to be their most positive festive period in years, the industry has been jolted by fresh uncertainty following the Autumn Budget.

The tax changes have prompted a punchy reaction. Retailers of all sizes and categories have warned that the new rules will cause job losses and price rises in a not-so-distant future.

At the heart of concern is the hike in national insurance contributions (NIC) for employers, which the British Retail Consortium estimates will add some £2.5bn to the industry’s annual tax bill. Higher costs from next year’s increase in the minimum wage are expected to place further strain on a sector already operating on thin margins.

What may be less straightforward to ascertain is what impact the Budget will have on consumer confidence and the wider industry – both in the short term and as we move into 2025.

Gloom, not boom?

Early indicators suggest that the boost to sentiment that some expected from Labour’s “bold Budget” has yet to materialise.

Concerns about tax hikes had already pushed consumer confidence to its lowest level since March in the lead-up to the Budget. Recent data from the S&P Global Market Intelligence survey, conducted between November 7 and 12, shows that British households have grown even gloomier since then.

The headline consumer sentiment index fell in November despite the Bank of England’s interest rate cut, the S&P data showed, while other indicators including job security and household finance also turned lower. The consultancy warned that any intensification of job worries could spur more pessimism and cast a shadow on consumer spending.

Beyond the immediate hit to confidence, there are broader concerns about the ripple effects of the NIC change on employees and consumers over the medium term, and the adjustments businesses will need to make.

Major retailers have already said that job losses are inevitable as they work to absorb the added costs to their payrolls. But the impacts may extend to the wider job market, with analysts at Goldman Sachs forecasting a cooling in private sector pay growth next year, partly due to the NIC hike being passed on. The bank also predicts a slowdown in the real disposable income growth, which is set to moderate consumer spending in the second half of 2025.

However, with households in a despondent mood and still struggling with the cost of living – now confirmed by a resurgence in inflation in October – a squeeze in discretionary spending could emerge as early as January, as the spending resilience of the holiday season begins to fade.

Another period of adjustment

What is certain is that retailers are heading into a challenging period of adjustment. To make the numbers work post-Budget, they face tough choices seeking to balance the spiralling costs of NIC and minimum wage increases with the need to invest in productivity-enhancing areas such as technology.

Marks & Spencer, which estimates the tax changes will add £60 million in extra costs, plans to offset the hit by boosting investment in efficiency initiatives and automation.

The retailer said it will double down on its existing cost-saving programme, targeting cost-out opportunities in supply chain, as well as modernising legacy stores, distribution centres and systems. M&S is prioritising cost reductions first as “customers should not bear the brunt of the extra expense,” chief executive Stuart Machin has said.

One silver lining is that retailers have built a strong track record over recent years of absorbing inflation, and of adapting their business models to meet constant changes. The challenge now will be to move beyond the low-hanging fruits and identify new areas and strategies for cost savings.

For example, we see a transformative opportunity in taking a laser-focused view on assortment productivity, especially as the economics of maintaining wide, unproductive ranges becomes more challenging.

Tightening ranges and investing funds in promoting the brand and product value propositions is another prospect available to retailers looking to improve cash conversion and profitability.

Finally, to help ease the financial burden, the industry should continue to leverage the R&D tax relief scheme – whose continuation was confirmed in the last Budget – to support investments in products and new technology, especially in connection with ecommerce.