Christopher Daker
Assistant Head of Credit Underwriting,
Allianz Trade
Retailers have faced significant challenges over the past four years. For discretionary retail in particular, the pandemic hit hard, with physical store closures and reduced consumer spending leading to sharp revenue declines. While spending rebounded as lockdowns eased and households dipped into savings, rising inflation and higher Bank of England base rates have since eroded purchasing power. Sales volumes remain below pre-pandemic levels.
The cracks in some business models, previously hidden by the consumer spending boom of 2021–2022, are becoming more visible. Recent failures like Wilko, Body Shop, Ted Baker, Carpetright, and Homebase highlight the risks. To stay competitive, investment in omnichannel solutions, customer experience, and sustainability is crucial. At the same time, firms must manage volatile costs in materials, energy, and transport.
Inflationary pressures are likely to rise in the coming quarters. Success will hinge on how well businesses manage these challenges while delivering compelling value to consumers.
Summary
Sector rating (Global): Medium Risk
Sector rating (United Kingdom): Medium Risk
Swipe to view more
|
Strengths |
Weaknesses |
|
Resilient labour market – unemployment levels remain low at 4.3% for September 2024; estimated number of vacancies in October 2024 decreased by 35,000 to 831,000 marking a 28th consecutive period of decline but remain above pre-pandemic levels. |
Retail volumes remain below pre-pandemic levels – yet costs are rising through a combination of National Living Wage rises and competition for staff, with changes to national insurance in the new year also set to increase labour related expenses. Potential for redundancies if volumes remain subdued and costs cannot be absorbed or passed on. |
|
Savings buffers remain elevated – UK households saved c.11% of their income in the first 3 months of 2024, which is the highest rate (excluding the pandemic) since 2010. Presents an opportunity for growth when these savings are tapped into and consumer sentiment changes, though rates will certainly need to come down first. |
Polarised Markets Fuel Competition - Strong price competition and widening societal divide to produce higher competition in low and high price brackets.
Intense competition between online and incumbent discretionary retailers. |
|
Changing consumer habits are an opportunity – retailers with the coffers available can invest in omnichannel to ensure breadth of service. |
In the face of growing e-commerce penetration, adaptation to new business models proves very challenging and costly for incumbent retailers. |
|
Expertise of established players on supply-chain issues – after the issues seen during/immediately after Covid, retailers will have experience of dealing with volatile supply and ensuring appropriate controls are in place to mitigate. |
Demand driven by economic factors which are largely outside of retailers control, such as GDP, inflation, interest rates, etc. |
Key trends and challenges that will shape the industry:
- Rebound of inflation
Inflation soared to over 10% at its peak in mid-2023 but dropped to 1.7% in September. However, it edged up to 2.3% in October, driven by rising household costs, especially energy. Analysts expect this upward trend to continue into 2025. - Trends in employment, salaries, savings, and consumer credit
With a 6.7% increase in the minimum wage, introduced in the Labour Government's Budget 2024, there’s a positive outlook for employment. This adjustment is expected to help employment rates edge closer to pre-pandemic levels. Over the past year, employment rates have risen, and this upward trend is set to continue. - Value retail disruptors
The cost-of-living crisis has significantly impacted shopping habits, as reflected in the shifting market shares among major supermarkets. Tesco and Sainsbury’s are leveraging their scale and diverse product ranges to appeal to various budgets, while disruptors like Aldi and Lidl continue to expand their market share by focusing on value.
A similar trend is evident in the fashion industry, with young shoppers driving the move to online platforms. Brands like Shein and Temu are gaining traction by prioritising affordability. However, managing the costs associated with high return rates remains a persistent challenge for businesses in this space. - Supply Chain visibility and sustainable practices
Supply chain visibility (SCV) provides retailers with a comprehensive view of how goods move from supplier to consumer. By integrating data, technology, and processes, SCV enables real-time tracking of upstream and downstream activities, offering the flexibility to adapt to changes in demand and the flow of goods, as well as improved inventory control. Importantly, SCV also shines a light on ESG-related matters—an area of growing significance for investors, funders, and consumers alike. - Evolution of high streets
There are more than 5,000 roads named High Street in United Kingdom. Sadly, their role as social and commercial hubs are diminishing. Footfall has still not fully recovered to pre-pandemic levels and when combined with high inflation and flagging consumer confidence, we’ve seen an average of 38 high street units closing every day over the first six months of 2024. Banks marked the highest declines, followed by clothing stores, printers, bookmakers, pubs, and clubs.
Consumer
Consumer behaviour remains the driving force behind how the sector performs, evolves, and innovates. Consumer confidence measures provide valuable insight into how people feel about the economy, their personal finances, and, in turn, how spending patterns are shaping up—both for essential and discretionary purchases.
Consumer confidence hit a record low of -49 in September 2022. Since then, falling inflation, lower interest rates, and an improved outlook on personal finances have contributed to a steady recovery, reaching -14 by August 2024. However, sentiment weakened slightly in September (-20) and October (-21) as concerns about the Autumn Budget began to affect confidence and spending. Even so, the latest figures still show a marked improvement compared to the same period last year.
Despite stronger consumer confidence in the first half of 2024, retail sales underwhelmed as poor weather disrupted demand for big-ticket items, DIY products, and gardening goods. This left many retailers overstocked with seasonal items, putting additional pressure on cash flows. The hope now is that reduced spending earlier in the year and in Q3 will pave the way for a stronger Q4.
On a positive note, personal finance sentiment continues to boost confidence indicators. As the cost-of-living crisis eases, inflation falls, and interest rate cuts provide relief, many households are feeling more financially secure. Elevated savings rates, particularly when compared to pre-pandemic levels, offer further encouragement that consumers may have the flexibility to spend during the upcoming Golden Quarter. Discounters, which gained and maintained greater market share during the crisis, underscore the lasting impact of changing shopper behaviour.
Convenience, value, and affordability are at the forefront for today’s modern consumer. To stay competitive, both brick-and-mortar and online retailers must innovate and diversify shopping experiences while keeping prices in line with competitors. Credit use is also playing a growing role in purchasing decisions, whether for everyday essentials or one-off big-ticket items. In July 2024 alone, UK cardholders made 403 million credit card transactions domestically and overseas, spending a total of £68.8 billion—a 0.9% increase compared to the same period last year. Meanwhile, Buy Now Pay Later (BNPL) schemes have surged in popularity, with an estimated 14 million UK users in 2024.
Retail in a Post-Election Economy
Although 2023 ended in a technical recession during Q3 and Q4, growth forecasts for 2024 and 2025 have improved slightly. The IMF has revised its 2024 UK GDP growth forecast upwards from 0.7% to 1.1%, with the 2025 projection remaining steady at 1.5%. October’s S&P Purchasing Manager’s Index (PMI) indicated a dip in growth, yet the broader trend since 2022 remains positive. However, challenges persist, including rising costs stemming from the recent budget, which may temper optimism.
Retailers face three major cost inflation pressures starting next year. These challenges are particularly significant given that 3.5 million people work in UK retail (2023, Statista). Big decisions lie ahead on how to absorb or pass on these costs—through cost reductions, price increases, or a combination of both:
- Employers’ National Insurance (NI) Contributions: From April 2025, employers’ NI contributions will rise by 1.2% to 15%. Additionally, the threshold at which businesses start paying NI per employee will drop from £9,100 to £5,000, generating an estimated £25 billion annually.
- Minimum Wage Increase: The minimum wage is set to rise to £12.21, further increasing wage bills for retailers.
- Changes to Business Rates Relief: Retail properties currently benefit from a 75% business rates relief (capped at £110,000 per business), but this will fall to 40% in April 2025. Meanwhile, the small business multiplier will remain frozen at 49.9p, funded by a higher multiplier for properties valued over £500,000, starting in 2026-27.
Ongoing trade disruption impacts
Supply Chain
A recent ONS study highlighted that supply chain concerns are particularly acute in the wholesale and retail trade sector, affecting 34% of businesses.
The top factors causing supply chain disruptions include:
- Increased Barriers to Trade: Reported by 8% of all businesses, with the wholesale and retail trade and manufacturing sectors both at 17%.
- Shipping Disruption: Cited by 8% overall, rising to 23% in the wholesale and retail trade sector.
Global shipping challenges further exacerbate these issues. Containerships and tankers, which transport over $11.5 trillion in goods and energy annually, face significant delays. Diversions away from the Red Sea due to conflict and reduced transit through the Panama Canal caused by drought are removing container capacity from the market. These diversions and delays lengthen transit times, straining supply chains across industries.
Drewry’s World Container Index remained stable at $3,440 per 40ft container this week.
Current price is 67% below the pandemic peak of $10,377 but 142% more than the average $1,420 in 2019 (pre-pandemic).
Political
President elect Trump has pledged an increase in trade tariffs, with Allianz Research forecasting an initial 25% for Chinese imports and 5% from the rest of the world. These would hit supply chains throughout the world, likely triggering retaliation and raising costs.
ESG
ESG considerations are becoming central to lending and consumer behaviour. Currently, 73% of lenders have an ESG lending strategy in place, up from 57% in 2022. Furthermore, 81% of lenders state that a firm’s ESG status or ability to transition to net zero will increasingly shape their lending decisions over the next five years.
Consumer expectations are following a similar trajectory. According to a First Insight survey reported by Forbes, three-quarters of consumers across all age groups want businesses to operate more sustainably. Companies failing to meet these expectations risk losing customers to competitors that are innovating in this space.
Omnichannel & Customer Experience
Online retailing has not resulted in a simple substitution of physical shopping for online shopping. Successful physical stores have developed online services complimentary to their physical presence. This allows customers the option to browse goods in the store and then order them online/pick up goods they have bought online in physical stores.
The British Retail Consortium have argued that post-pandemic, retailers have to “react to a fundamental shift in attitudes towards consumerism.”
Supply chain problems have continued since the pandemic and maybe affected as the political landscape changes next year. Innovation and new offerings to the consumer will play an increasing role in adapting to a new environment.
Christmas
Has the Golden Quarter lost its sparkle?
In the run up to the Golden Quarter, retailers are on tenterhooks with hopes of a bumper period following a weak start to the year. Eager for a sales boost, a record £10.5bn has been spent on advertising for the quarter to battle against competitors and encourage consumers to spend. But looking forward at expectations, there are two sides of the coin. A shiny, sparkling side where positive results derive from the release of pent-up demand following a weak summer where consumers cut spending on big ticket items and DIY, tapping into savings which remain above pre-pandemic levels. Or could it be dull and tarnished, consumers reining back spending as confidence remains subdued by concerns around further inflationary pressures to come and the domino effect it could have on employment levels.
The question is yet to be answered, which side will the coin land?
Laura Bruce
Senior Credit Underwriter Allianz Trade
John McKay
Credit Underwriter
Allianz Trade
Keith Chan
Credit Underwriter
Allianz Trade
Download
From our experts to your inbox
– never miss a thing
Receive our latest economic and insolvencies updates from our experts.
Follow us
You might also be interested in…
Invoice factoring vs financing:
What’s the difference?
What is invoice factoring and how does it work?
Let's talk...
For a free credit insurance consultation call our UK team, 09:00-17:00 Mon-Fri.
Our expertise and commitment
Allianz Trade is the global leader in trade credit insurance and credit management, offering tailored solutions to mitigate the risks associated with bad debt, thereby ensuring the financial stability of businesses. Our products and services help companies with risk management, cash flow management, accounts receivables protection, Surety bonds, Business Fraud Insurance, debt collection processes and e-commerce credit insurance ensuring the financial resilience for our client’s businesses. Our expertise in risk mitigation and finance positions us as trusted advisors, enabling businesses aspiring for global success to expand into international markets with confidence.
Our business is built on supporting relationships between people and organisations, relationships that extend across frontiers of all kinds - geographical, financial, industrial, and more. We’re constantly aware that our work has an impact on the communities we serve and that we have a duty to help and support others. At Allianz Trade, we’re strongly committed to fairness for all without discrimination, among our own people and in our many relationships with those outside our business.