Executive Summary

Retail sales are still strong in the US and recovering in Europe, but uncertainty could derail the ongoing improvement. In Europe, retail sales are recovering unevenly, with modest gains in countries like France and Spain (+1.6% y/y on average over Jan-Sept. 2024 and +1.4%, respectively), while Germany and Italy are recovering but more modestly. In the UK and the US, retail sales remain robust at about +2% over the same period. Wealthier consumers have been driving growth in the US as their spending grew by about +7% in 2023, almost double the growth of the poorest’ households. Consumer confidence is showing a similar recovery pattern but savings rates in Europe remain high (e.g. 17.6% in France and 20% in Germany) as households still grapple with inflation and political uncertainty. The US consumer is much more optimistic. We find that retail sales in European countries are more sensitive to confidence shocks, which cause up to 18% of retail sales swings in the UK and 9%-10% in Germany, France and Italy, compared to only 7% in the US, increasing the risks for the sector in Europe. Fixing the confidence nexus in Europe will fix the demand issue for retailers. However, in the US, Trump’s tariffs could cut the disposable incomes of poorer households by about -6%.

The pricing power party is over: Retailers’ profitability is under pressure as inventories have piled up. Retailers around the world are struggling to preserve profitability as decreasing sales in volumes and still high operational costs erode margins. In the post-Covid era, and even more after the onset of the war in Ukraine, retailers turned to a stockpiling strategy: The global retail sector increased its inventories by 8 days of turnover on average over the four years following Covid-19. This has now become a burden as slower demand growth forces retailers to offer aggressive discounts. Against this backdrop, retail is the second sector contributing to large insolvencies globally, according to our monitoring the sector on average accounted for one in every five insolvencies. In this context, retailers are mainly turning to two strategies to cope. The first is cutting prices and offering promotions to appeal to cost-sensitive consumers, particularly in essential categories like food, household items and personal care. The second is focusing on the premium and luxury segments, where wealthier consumers continue to spend, sustaining demand for high-margin goods such as luxury items and electronics.

Shopping online is here to stay but shopping responsibly is taking a backseat. E-commerce has seen explosive growth, with global revenues expected to surpass USD6.5trn by 2029, though growth is slowing (CAGR of +9.5% vs. +13.5% in the previous five years). Technology is enabling new channels such as social commerce that are gaining traction, especially among younger, digitally native Gen Z consumers, though it remains relatively nascent in the US and Europe compared to markets like China and India. On the other hand, responsible purchasing trends, such as organic food and eco-friendly products, have taken a hit due to the purchasing-power crisis. In both the US and Europe, consumers are prioritizing affordability over sustainability, leading to slower growth in these categories as spending shifts toward non-discretionary goods.

Looking ahead, AI and automation can create a tech dividend for retailers. Retailers are increasingly investing in technology to optimize supply-chain management and enhance operational efficiency. Real-time data analytics, AI-driven demand forecasting and automation are being deployed to address inventory challenges and adapt to shifting consumer demand. Omnichannel strategies that blend online and in-store experiences are helping retailers expand their reach and improve customer convenience, though implementation costs and challenges remain significant. Nevertheless, it is estimated that retailers that adopted AI/ML have grown their sales in 2024 twice as fast as their competitors that have not.