Retail industry outlook

19 February 2024

Inflation was the standout theme for retail performance in 2023. Sales volumes and values continued to deviate as consumers reduced the number of goods they purchased in the wake of higher living costs.

Looking to 2024, we expect a better picture for demand, with retailers able to look ahead with cautious optimism. Using insight from our recent consumer sentiment survey alongside the latest economic data we have provided an outlook for consumer spending in 2024 and identified the opportunities and challenges for the sector this year.

Outlook for demand improves as consumer finances recover

Our annual consumer sentiment survey found that 96% of consumers are concerned about the cost of living compared to 98% we reported last year. This marginal improvement in sentiment indicates retailers aren’t out of the woods yet when it comes to hampered demand in the face of inflation. But in 2023 – a year characterised by high inflation and interest rates – we saw consumer spending hold up better than many would have predicted. So, what might this mean for 2024?

2024 looks set to be a tale of two halves. The end of 2023 saw the trend for quantity of goods purchased decline, down by 2.8% on an annual basis. From this we expect the stagnation of sales to continue for the first half of 2024 whilst consumers continue to grapple with higher prices and interest rates. The sentiment recorded from our survey supports this with 92% of consumers saying higher prices will impact non-essential spending in the next 12 months and 78% saying the same for high interest rates. This all adds up to another challenging period for the sector when it comes to anticipating demand.

However, inflation is forecast to come back to the Bank of England’s target rate of 2% from the second half of the year, and interest rates will likely fall from summer. This paints a more positive picture for consumer’s finances in the second half of 2024. Additionally, real wages will continue to grow throughout the year and tax cuts look set to be announced in March’s Spring Budget. All these factors should culminate to create a much-needed boost to consumer confidence and a positive knock-on impact for retail sales.

So, what consumer behaviours will define the retail landscape in the coming year according to our latest report?

Greater market opportunities for own-brand product lines

The cost-of-living crisis has caused a shift in consumer behaviour towards cheaper alternatives, especially in the own-brand segment. Our report shows that over a third of consumers are buying more own-brand products than they did a year ago. In response to this increase in demand, many retailers have created and grown their own-brand offerings.

As cost-of-living pressures ease in the latter half of 2024, it is plausible to anticipate consumers will return to their familiar and trusted brands. This is not what our survey indicates. In fact, our research found that 71% of consumers will not reduce the number of own-brand products they purchase after pressures have eased, with almost a quarter of respondents indicating they will increase their consumption of these goods.

Interestingly, it’s not just low-income households who plan to continue buying own-brand products. 54% of high earners – those earning £60K and over – buy more own-brand products than they did a year ago. Additionally, 70% of this group say they will not reduce the number of own-brand products they purchase after cost-of-living pressures have eased.

Clearly the boom in own-brand product lines we’ve seen is here to stay, with heightened demand across all household earning brackets. This indicates capacity in the market for retailers to expand these lines. But what appeals to consumers when it comes to purchasing own-brand products?

Grocery products, along with clothing and fashion accessories, and health and beauty products are the top three areas where consumers will purchase own-brand lines. Looking at the year-on-year results across all categories, spending intentions broadly stayed similar. However, there was one outlier and that was clothing and fashion accessories. This category saw an increase in sentiment this year, with over a quarter of consumers saying they are likely to buy own-brand products in this category compared with a fifth of respondents last year. With an ever-growing number of clothing and accessories retailers increasing the number of third-party brands they stock, including M&S, Next and John Lewis, it’s interesting to see that consumers are looking for more choice when it comes to own-brand lines. This signals that retailers should be focusing on their own product ranges just as heavily as third-party relationships.

Sustainability is back on the agenda

The height of the cost-of-living crisis saw consumers' willingness to spend more on sustainable goods and services dwindle. With inflation easing our survey shows sentiment towards sustainable spending has improved by 4% on average when compared to last year.

With consumers increasingly aware of the impact their choices make on the environment, many are looking for products and services that align with their values and reduce ecological footprints. Consumer’s concerns around environment are not equal and vary greatly depending on age-bracket and income.

78% of those with a household income of £80k and over are concerned about their household's impact on the environment, along with 69% of Millennials, making these groups the most likely to tailor spending to meet sustainability and environmental concerns. When it comes to consumer goods, 46% of Millennials will pay more for products that are sustainably produced and 47% would pay more for products with environmentally friendly packaging. This sentiment becomes even more established when we look at those with a household income of over £80k, with 63% saying they will pay more for products that are sustainably produced. Additionally, 56% of this group say they will pay more for products with environmentally friendly packaging.

As financial pressures on consumers ease in the second half of the year, we anticipate a renewal of sustainability and environmentally conscious spending habits. Brands should direct their attention to this area by introducing product ranges that not only align with consumer values but also facilitate positive action concerning climate, environment, and societal well-being. Retailers can position themselves at the forefront of this renewed commitment to sustainable consumption by understanding the preferences of these different demographic segments.

Women’s financial strain drags on clothing spend

Our research found that 62% of men feel comfortable financially, versus 42% of women. This significant gap of 20% in financial confidence between the genders will have an impact on their spending preferences in the upcoming year. This is particularly apparent when we look at the differing priorities for future cutbacks.

A similar pattern emerges when we examine the spending plans of men and women for this year across different categories. They both intend to reduce their expenditure in the same five areas, but they rank them differently in terms of importance. Women are more likely to cut back generally, and this is particularly apparent when it comes to clothing and accessories. While 36% of women will spend less on these items, only 18% of men will do the same.

To adapt to the changing habits of consumers, womenswear retailers need to think of ways to stay ahead of the curve. One strategy that worked well for top-performing retailers in 2023 was to reduce the number of products and adjust the quantities of stock orders. The goal? A more focused range that aims to sell out products and maintain profit margins.

By focusing on value and style rather than choice, Marks and Spencer simplified its clothing and accessories ranges and achieved impressive H1 results. Its clothing and homewares sales increased by 5.5% on a LFL basis and it earned the highest net promoter score for quality and value in summer 2023. It also gained the leading overall market share position for womenswear in the same period, a feat it had not accomplished in four years.

Marks and Spencer’s customers – typically female and increasingly Millennial – rank value for money and quality as their top priorities when purchasing. In an uncertain economic climate, Marks and Spencer shows that knowing your customers’ needs can deliver better profit margins despite lower demand.

Men’s and genderless health and beauty gains momentum

The health and beauty industry in the UK is booming and expected to reach almost $17 billion by 2024, growing annually by 2.29% between 2024 and 2028.

Historically the industry has been divided along gender lines. However, in recent years, the traditional associations of health and beauty with feminine products such as lipstick and nail polish have been challenged. The male grooming market is now a thriving sector, expected to reach $115 billion in value by 2028, according to Statista. This is up from nearly $80 billion in 2022. Our survey data confirms this trend, showing that only 10% of men intend to reduce their spending in this category, compared to 25% of women. Moreover, men are more likely to opt for high-end products (branded or premium) than women, with only 14% switching to own-brand products in the category, compared to 29% of women.

We're seeing this trend play out in the industry too. Deciem, the parent company of The Ordinary, a genderless beauty brand, posted profits of $460 million in 2021. According to Similar Web, a digital data agency, 39% of the people who visited the brand's website were men. One of the biggest deals in the health and beauty sector in 2023 was Aesop's acquisition by L’Oreal. The deal was worth $2.525 billion, making it the largest deal ever for the French beauty giant. Aesop, a well-known Australian brand, has classic genderless packaging and is positioned as a luxury product. Its rapid growth in recent years and the high price paid by L’Oreal demonstrate the potential of this segment of the market.

We anticipate further growth in this space this year and new entrants to the market when it comes to men’s and genderless health and beauty. As brands wise up to the evolution of men’s health and beauty, the way businesses market to men must evolve. In the 90s and 2000s, men’s products were marketed in a typically masculine fashion, with dark packaging and sports stars heading up TV and print ads. However, with a new era of poster boys like Timothy Chalamet and the likes of Pharell Williams (who has released his own ‘all-gender’ health and wellbeing line) perceptions around men’s beauty are changing. New entrants will need to break free from previously accepted norms and embrace a more diverse and expansive vision for personal care.