AJ Bell, one of the largest investment platforms in the UK, cautioned this month that 'investors have fallen out of love with the retail sector.'
This sentiment comes after 11 out of 20 companies with UK retail operations have seen their share prices fall on Christmas trading updates.
Indeed, Sainsbury's, the second biggest retailer in the United Kingdom, began 2025 by announcing plans to cut 3,000 jobs citing a 'challenging cost environment.'
Meanwhile, Associated British Foods trimmed the annual sales guidance for its clothing business, Primark, after the division’s sales declined in the UK and Ireland during the Christmas quarter.
'Cost Pressures'
“It is too early to truly quantify the full impact of the Budget-related cost pressures on the retail sector,” said Dan Coatsworth, investment analyst at AJ Bell. “Putting a number on the extra costs is one thing; the ways in which retailers offset the extra costs and how that affects consumer spending patterns is another."
Experts at AJ Bell believe the outlook is tarnished by the prospect of inflation moving higher, the labour market weakening as companies reduce hiring, and a weakening economy.
Additionally, the increase in employer National Insurance, a higher National Living Wage and changes to employment rights could cost shopkeepers tens of millions of pounds.
'Stealth Route'
“There is a real risk that retailers hike prices just as consumer confidence crumbles, creating a toxic cocktail that ends in tears for the sector," said Coatsworth.
It now seems inevitable that many retailers will try and predict extra costs they will incur from the Budget decision and will soon act accordingly.
“Only a few companies have explicitly said they are passing on some of the extra costs through higher prices, including Next," said Coatsworth.
"Signposting price hikes is a dangerous strategy for any retailer as it could put customers off visiting the shop or website if they know products are going to be more expensive."
He added, “Retailers are more likely to go down the stealth route and quietly raise prices with no warning, hoping that consumers either don’t notice or they pay the higher cost because they’ve already gone to the effort of choosing a product."
Consumer Confidence
The latest figures suggest that the slashing of rates by the Bank of England has done little to raise the confidence of anxious consumers.
During previous times of financial uncertainty, value retailers could entice shoppers to cheap goods, attracting lower income households as well as more affluent people trading down to cheaper alternatives. However, this does not seem to be the case this time around.
“It feels like lower income households are at stretching point where they are only buying the absolute essentials and little else," says Coatsworth. "The prospect of retailers passing on extra Budget-related costs from April in the form of higher prices suggests their outlook is even gloomier."
The Year To Come
The past twelve months have undoubtedly been difficult for retailers with a range of issues to contend with.
Research suggests that lower income households are being squeezed to the limit while middle income earners are cutting back for the foreseeable future also.
In 2025, many retailers will have to face difficult decisions around what strategy and approach to take to entice customers.
'Plough Ahead'
“When times are hard, retailers typically discount their goods to encourage more sales," said Coatsworth. "Value retailers are reluctant to go down this path as their margins are often skinny to begin with."
Coatsworth concluded, "They’re simply going to have to grit their teeth and plough ahead, accepting that the environment is unfavourable and that the business needs to be run as efficiently as possible."
