Retailers in the UK will continue to face a slowdown in sales growth in 2024, with consumer confidence remaining fragile and competition intense, AJ Bell investment analyst Dan Coatsworth has said.
“Look beyond management comments of robust sales and a fortuitous Christmas trading period and you will find the retail sector has a multitude of challenges for the year ahead,” Coatsworth noted.
“The message from the latest batch of trading updates has been fairly clear – consumers are happy to buy stuff that is essential, such as an affordable treat or an experience, but they are thinking long and hard about anything more expensive or not vital."
Coatsworth has identified four main challenges facing the UK retail sector in 2024.
1. Slowdown In Sales Growth
Of the retailers that have reported post-Christmas trading updates, Marks & Spencer, B&M and Greggs were among those to report a slowdown, echoing a trend seen in late 2023, Coatsworth noted.
“A sales growth slowdown puts pressure on companies to be more clever with their marketing and to ensure they have the type of products people want to buy," he said. "This means offering stuff that is excellent value for money where the customer feels like they are getting something decent for their cash.
“They need to get it right from the moment the customer walks through the door and that extends to service, in-store décor and product availability. For those with an online offering, the website or app needs to be easy to navigate and orders dispatched swiftly.
“Retailers have put up prices over the past few years as they passed on inflationary pressures to the customer. This strategy may not work in 2024 as inflation appears to be easing and certain companies do not want to exploit their customer base by asking them for even more money per item."
2. Inventory Management
According to Coatsworth, certain retailers held the "wrong types of products on their shelves at moments in 2023 after making bad calls", based on question marks over stock or the weather failing to follow seasonal norms.
“Climate change has complicated matters and resulted in mild autumns and wild swings in temperatures and precipitation during the summer, leaving retailers flummoxed," he said, noting that the issue has been particularly prevalent among fashion retailers.
“They will need to adapt to sudden changes in the environment so as to avoid shelves of shorts and summer dresses going unsold when there are weeks of rain, and thick jumpers gathering dust while everyone enjoys mild conditions in September to December, for example."
3. Consumer Confidence
A rise in interest rates over the past year has made consumers "more wary" about how and where they spend their money, with many having no spare cash after monthly bills have been settled, Coatsworth noted.
“Any interest rate cuts this year may only provide minor relief to household finances," he said. "We are unlikely to suddenly see people with masses of extra money in their pocket as the pace of rate cuts could be slow. That means retailers still need to be on alert for tough market conditions and to offer value for money wherever possible.
“Fragile consumer confidence suggests a difficult year ahead for big ticket retailers and sellers of goods that are nice to have, but not essential.
“Any extra money that consumers do get as a result of a rate cut might go towards paying down debt or straight into the holiday kitty, as travelling remains a priority for so many. Consumers would rather cut back on certain areas to ensure a week or two in the sun abroad than fritter money away on the high street.”
4. Intense Competition
Competition in the UK retail market is currently "intense", said Coatsworth, with weaker operators unlikely to survive amid "tough" market conditions.
“The business world has followed the same pattern for centuries," he said. "If someone has a clever idea and makes a successful business out of it, another person will copy that idea in the hope of getting a slice of the pie. Retail is chock-a-block with similar propositions, each having a different spin on fundamentally the same idea.
“A well-trodden path to fight back against competitive threats is to reward customer loyalty and provide an incentive to stay with the same retailer. This might be awarding loyalty points which convert into money off goods or access to cheaper prices if you scan your loyalty card. Tesco has used the latter approach as a key tool in its fight against Aldi and Lidl, and now Sainsbury’s and Co-Op have copied this strategy with their loyalty schemes unlocking cheaper prices.
“Unfortunately for them, the Competition and Markets Authority is casting its eye on matters amid concerns that grocers are restricting the bulk of price promotions to loyalty scheme members.”
