Retail Outlook

2018 has been a tumultuous year for the UK retail sector. What's in store for retailers this Christmas?

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2018 has been a tumultuous year for the UK retail sector. The perfect storm of muted demand and cost pressures we first saw in 2017 has intensified.

On the one hand, retail sales have been little better than flat, particularly in the second half of the year, as consumers continue to eschew big ticket purchases, and divert their spending to non-discretionary areas and online rather than on the high street. On the other hand, there has been no respite to cost inflation, whether input prices, staff costs, business rates, and now also the costs of Brexit contingency planning.

And, worst of all, the high street has seen more casualties, with several high profile retailer failures and the CVAs (or company voluntary arrangements) becoming the preferred mechanism for other retail and leisure operators to reduce their store numbers.

So, there is anticipation and hope that to the traditional “Golden Quarter” will bring tidings of comfort and joy to retailers up and down the country. Surely things can only get better?

While there’s no question that retailers are facing the hardest operating environment in a decade, we believe there will still be winners this Christmas. Consumers are still spending, and Christmas is still a time for giving and celebrating – we plan to spend £420 each on presents alone. They will reward those retailers that chime in with their spending preferences, and are in tune with where, how and why they shop.

Here are our twelve predictions for the UK retail sector over this festive season. Please get in touch to discuss how the peak trading season might affect your business, and join us around the country in the New Year for our round up of Christmas trading results and outlook for 2019.

Source: PwC Consumer Survey, October 2018

Our 12 Predictions for the Retail sector

 

1. Consumer sentiment holding up

Everything to play for this Christmas, as consumers are cautiously optimistic about their fortunes…

2. How much we’ll spend on Christmas presents

…but who will be spending the most on presents?

3. When we’ll buy our presents

The young will shop earlier, men will shop later, and hardcore bargain hunters will wait for the sales

4. Black Friday is here to stay

From big bang to twin peaks: retailer promotional periods reflect the new consumer reality

5. Practical gifting wins the day

Fashion will have a challenging Christmas, but kidswear and young fashion may buck the trend

6. Me, my children and my pets

No expense spared on our children, our pets… and ourselves

7. Wishing you a sustainable Christmas

From palm oil to plastic straws and the circular economy

8. Multi-multi-channel shopping

As well as more of us shopping online, under 25s are taking advantage of mobile and social channels

9. Happy Click & Collect-mas

Consumers may be shopping online, but click & collect may bring some of them to high streets…

10. Online gain leads to High Street pain

…but footfall is declining across the board, and we can expect more store closures and fewer openings

11. Overcapacity and falling footfall hit leisure

Falling high street footfall will affect rapidly expanding leisure operators as well as retailers

12. Dinner’s at the top of the Christmas Tree

If we won’t go out, then we’ll celebrate at home: Christmas Dinner remains our biggest spending priority

1. Consumer sentiment holding up 

Everything to play for this Christmas, as consumers are cautiously optimistic about their fortunes…

Much has been made about the fact that consumer spending has been squeezed this year, and that the retail sector has suffered as a result. And it’s true that in 2017 and for the first part of 2018, earnings did not rise as quickly as inflation, so disposable income would have been squeezed for the first time since 2014.

However, there are a number of promising signs that it’s not all doom and gloom for consumers. Absolute pay growth is now at a higher level than at any point since the beginning of the Global Financial Crisis, and it is once again growing faster than inflation. Unemployment remains low, and this is a key driver of consumer confidence, particularly when considering major purchases.

And PwC’s own consumer sentiment survey, now in its tenth year and historically an accurate predictor of future consumer spending, found that marginally more people thought they’d be better off in the coming year than worse off. That’s an improvement on earlier in the year, and better than at any point during the recession up until 2014. Moreover, young people continue to be the most optimistic – only over 55s and socioeconomic group E (benefit dependent, state pensioners) think they will be net worse off.

Therefore, there’s nothing’s to suggest consumers won’t be spending at all this Christmas, but how much will they spend, what will they buy, and where from?

Source: PwC Consumer Survey, September 2018

Source: PwC Consumer Survey, October 2018

 

2. How much we’ll spend on Christmas presents

…but who will be spending the most on presents?

The average Briton told us that they planned to spend £420 on Christmas presents this year. Given that discretionary income (i.e. spending power after essentials) in the UK is around £200 per household, according to Asda’s monthly income tracker, this means a typical household will need to save for over a month just to pay for Christmas presents.

According to our survey, Christmas presents are even more important amongst families, with the highest spending 35-44 year old age group planning to shell out almost 25% more than average. The most generous present buyers will be North of the Border, with Scots spending an average of £454 each.

Meanwhile, 8% of us don’t intend to buy any presents at all. These are typically older people, with 12% of over 65s not planning to do any Christmas shopping.

Overall, we’re expecting to spend similar levels to last year, although what we will buy may well be different. Read on to find out more.

3. When we’ll buy our presents 

The young will shop earlier, men will shop later, and hardcore bargain hunters will wait for the sales

One in five of us claims to have started our Christmas shopping earlier this year, and that’s particularly true of young people (over 30% of under 35s said they’d start shopping earlier). The reality is likely to have been very different, with the mild early autumn certainly delaying fashion spending.

As usual, we expect peak Christmas period to be early-to-mid December, although a brave 6% (the vast majority of these being men) intend to shop the week before Christmas. With Christmas Day itself falling on a Tuesday, and the journey home for many expecting to start the previous Friday, shoppers will at least have a full weekend to make their last minute purchases. So we’re expecting a bumper shopping weekend and perhaps an increase in high street footfall between 22-23 December, which will make a change to the last few Christmases, when the wind down had already begun ahead of this.

Meanwhile, we are also seeing a polarisation of shoppers between those who expect to buy during the Black Friday sales, and those who prefer to avoid any of the sales altogether (one in five people). But, even though many of us expected to do some shopping over Black Friday, only 20% of us say we’ll do most of our Christmas shopping over that weekend.

Source: PwC Consumer Survey, October 2018

 

Source: PwC promotions tracker research

4. Black Friday is here to stay 

From big bang to twin peaks: retailer promotional periods reflect the new consumer reality

While only 20% of us say we’re doing most of our Christmas shopping over the Black Friday weekend, and half of us say we’re not interested in Black Friday at all, there’s no getting away from the fact that it is now a firm fixture in the annual retail calendar. Read more about what consumers told us in this year’s Black Friday consumer research.

Our biggest takeaways from Black Friday this year are that many retailers are now planning better for the event, and consumers are using it in a different way.

From the retailer perspective, our promotions tracker shows that over three-quarters of them now run some kind of promotion over that period, to take advantage of the increased footfall and web traffic. These are often planned in advance, with special stock sometimes brought in. Then retailers revert to full price for the key Christmas present buying period in early December.

While some observers have criticised Black Friday for being margin dilutive and cannibalising sales, we believe that retailers have adjusted their promotional schedule and many would have discounted anyway. Particularly amongst fashion retailers, those with blanket storewide promotions would have had to reduce prices in the run up to Christmas in order to clear excess stock; they’ve just chosen to do so over Black Friday to take advantage of consumer interest in the event.

And, from the consumer perspective, Black Friday has become the key period for buying “things for myself and my family” rather than Christmas presents, with electricals, fashion, beauty and toys right at the top of the shopping list.

5. Practical gifting wins the day 

Fashion will have a challenging Christmas, but kidswear and young fashion may buck the trend

Last year, we identified a trend towards ‘practical gifting’: not necessarily a reduction in spending on Christmas presents, but a diversion of spend towards more useful or practical purchases. Our survey echoes this. For example, apart from food and drink (see prediction 12), children’s clothing is where we’ll be spending more; in fact it is the clear number one category for the highest spending 35-44 year old age group.

Conversely, with people telling us they’d spend more on electricals and fashion over Black Friday, perhaps not surprisingly, those were the two categories cited amongst consumers as the lowest priorities for Christmas itself, and beauty was not far behind.

So Black Friday seems to have become the main period for indulgence, fun and self-gifting, while Christmas has reverted to its more virtuous roots.

The one exception to this trend is amongst under 25s. For this age group, the rankings were exactly reversed, with fashion and technology being the top categories for increased spend. While they are not the biggest Christmas present shoppers (£334, or about 20% less than average), they have the highest sentiment and the greatest optimism for their disposable income going forward. Can retailers of young fashion and mobile phones capitalise on this?

Source: PwC Consumer Survey, October 2018

Source: PwC US Holiday Outlook 2018

6. Me, my children and my pets 

No expense spared on our children, our pets… and ourselves 

That’s not to say there’ll be no indulgences and no fun over Christmas. Amidst the high street turmoil, our store opening and closure research  found that one positive ray was amongst ice cream parlours, booksellers, stationers, beauty salons and the like.

There’s debate about whether the ‘lipstick effect’, first coined by Estée Lauder in 2001, really does exist, and whether sales of smaller luxury items actually increases in economic downturns. Retailers are not leaving it to chance though: beauty was one of the most heavily promoted categories this Black Friday, and one discount supermarket is even stocking a beauty Advent Calendar with 24 mini treats for £49.99.

If beauty is not your thing, then the proliferation of alcoholic Advent Calendars may be more to your liking: so far this year, we’ve seen craft beer, gin and even tequila calendars.

Similarly, spending on children continues to be a priority, not just for 35-44 year old parents, as mentioned above, but also grandparents, with toys and children’s clothing being amongst the top spending priorities for 55-64 year olds and over 65 year olds respectively.

Meanwhile, a survey by American Express found that two-thirds of dog owners plan to buy their pets Christmas gifts this year, with each dog expecting to receive almost £20 worth of treats – or a total of £166m across the country. If that sounds like a lot, then spare a thought for our American cousins; according to PwC’s US Holiday Outlook , the average US pet owner will spend $67 on presents for their pets this year, rising to $183 amongst affluent millennials.

So, while Christmas budgets may not be increasing, it looks like consumers will make sure there’s enough left over for some fun, whimsy and indulgence over the festive season.    

7. Wishing you a sustainable Christmas 

From palm oil to plastic straws and the circular economy

At the opposite end of the scale from fun and treats, sustainability has emerged as the key consumer trend of 2018, and this Christmas is proving no different.

It’s little over a year since the BBC’s Blue Planet TV programme captured the imagination of the British public. The scale of consumer interest in the topic has taken some in the industry by surprise, as retail and consumer businesses have hurried to replace single-use and non-recyclable plastics with more sustainable alternatives.

Already this Christmas, one of the most talked about advertising campaigns has been around the impact of palm oil on rainforests. And, if current trends are anything to go by, other single issue campaigns are likely to emerge in the coming months, for which retailers need to prepared.

Still on the sustainability theme, grocers and fashion retailers are increasingly catering for non-meat eaters. Tesco predicted that one in five Christmas dinners would be catering for a vegetarian or vegan guest, and in some parts of the country, like Brighton for example, as many as 12% of Christmas dinners would be 100% plant-based. Want to dress to impress without harming animals? Dr Martens’ vegan boots and any number of vegan cosmetics are now on people’s shopping lists.

What does this mean for the consumer? We believe it will affect both where we shop and how we buy.

Firstly, retailers on the front foot have seen improvements in consumer awareness and favourability towards their brand.

Secondly, there has been an increase in popularity of more sustainable buying choices (e.g. greater interest in secondhand and vintage clothing, particularly amongst the young, with the growth of apps like Depop); and also traditional gifting that gives a nod to the circular economy (e.g. the resurgence of interest in collectable toys, that can be swapped and traded in the playground).

Source: PwC Consumer Survey, October 2018

8. Multi-multi-channel shopping 

As well as more of us shopping online, under 25s are taking advantage of mobile and social channels

While the march of online shopping seems to know no bounds, and our own research found that only a quarter of Black Friday spending would be in physical stores, Christmas shopping still seems to be as much about the high street as online.

This year in particular, due to Christmas Day falling on a Tuesday, and many people beginning their Christmas travels the previous week, we believe that the weekend of 22-23 December will be a busy one for high street stores around the country.

And it’s not because consumers don’t have faith in online retailers to deliver: as we mentioned last year, multichannel retailers are planning better and putting in more contingency and fail-safes, such that missed and delayed deliveries are fast becoming a thing of the past.

What comes through from our research is that consumers are using every channel available to them, and have become truly multichannel – or even ‘multi-multichannel’. That even extends to using home assistants and social media: e.g. while only 4% of consumers overall say they’ll click through Instagram or Facebook to buy presents, that number increases to 14% of 18-24 year olds.

9. Happy Click & Collect-mas 

Consumers may be shopping online, but click & collect may bring some of them to high streets…

As we mentioned above, online retailers and their logistics providers have been rapidly improving on their delivery propositions. Technology is at the forefront of this, with timed delivery slots, real-time tracking, ability for customers to change dates and times, and an overall delivery proposition that is light years away from what we had a few years ago.

However, it’s also true to say that the last few Christmases have not seen much extreme weather: you have to go back to 2010 for widespread December snowfall that disrupted travel plans and ecommerce deliveries across the country.

Nevertheless, consumers are taking no chances. Click and collect deliveries are growing at twice the rate of normal deliveries, and the click and collect options available to consumers are growing even faster. So not just deliveries to retailers’ own stores, but also to secure lockers (e.g. Amazon Lockers), manned collection points (e.g. CollectPlus and Hermes ParcelShop) and even to competitor retailers (e.g. Asda toyou).

As the popularity of click and collect grows, some high street retailers are even encouraging store-based click and collect, either by offering free or cheaper in-store collection to drive add-on sales, or by hosting third party collections to drive new customer footfall.

Right now, click and collect still only accounts for one-sixth of the overall online delivery market. But will its increased popularity be enough to reverse the decline in high street footfall?

Source: Global Data

Source: British Retail Consortium

10. Online gain leads to High Street pain

…but footfall is declining across the board, and we can expect more store closures and fewer openings

While for a time in 2016 there seemed to be stabilisation in high street and retail park footfall, 2018 has been almost consistently bad news for high streets up and down the country, with low single digit footfall decline almost all year.

That’s not to say there won’t still be reasons to visit, and that the high street won’t benefit from the timing of Christmas Day this year and the popularity click and collect, both of which we’ve discussed above.

And that’s also not to say that some shopping locations won’t buck the trend, including conveniently-located retail parks (often anchored by supermarkets, with grocery slower to move online) and true destination, day-out shopping malls (e.g. Westfield announced a 7% increase in visitors over Black Friday weekend this year).

However, with overall retail sales broadly flat, and online taking share, the reality is that the British consumer has less need to visit physical stores than ever before. We explored some of the themes around this in our store openings and closures research earlier this year.

According to our research on Company Voluntary Agreements (CVAs), the effects of this footfall decline won’t be seen this Christmas, but more likely early next year, with Q1 traditionally the most common time for retail failures and the store closures associated with these. While we don’t believe that CVAs are necessarily the most effective vehicle for closing stores, their popularity has not diminished in recent years, so the likelihood is that we’ll see more in the future.

11. Overcapacity and falling footfall hit leisure 

Falling high street footfall will affect rapidly expanding leisure operators as well as retailers

Of course, Christmas isn’t just about shopping, but also a time to celebrate with family, friends and work colleagues. While food, drink and entertaining in the home continue to be prioritised by the majority of consumers, what about going out?

As part of the ten-year anniversary of our consumer sentiment survey, we repeated a question we first asked in 2008, before the recession had taken hold. Here we asked not what consumers’ immediate spending intentions were, but what they thought they would do if they had to cut back their spending.

It’s true that clothing has crept up the list of cutbacks since 2008 (and mobile phones have slipped down the list), but by far and away the top answers were, and still are, leisure-related – either high street leisure (takeaways, restaurants and pubs) or holidays.

Leisure’s challenges are compounded by the same footfall decline and cost headwinds facing retailers, and also by recent rapid roll out, notably by casual dining chains, that has led to overcapacity on many UK high streets.

The final challenge for restaurants is the growth in popularity of home delivery. A recent survey found that 20% of millennials were eating out less, shifting an estimated £1bn of out-of-home spending into home delivery. While more restaurants offer home delivery from the same high street kitchens, the reduced footfall and change in operating economics is causing a headache for all operators.

So, if consumers really are tightening their belts this Christmas, perhaps retail won’t be the biggest loser. With as many high profile restaurant CVAs as retail ones earlier this year, and one pub a day closing on the UK’s Top 500 high streets according to PwC’s store openings and closures research, there may be more pain to come for the leisure sector in 2019.

Source: PwC Consumer Survey, September 2018

Source: PwC Consumer Survey, October 2018

12. Dinner’s at the top of the Christmas Tree 

If we won’t go out, then we’ll celebrate at home: Christmas Dinner remains our biggest spending priority

If there’s one thing the whole country seems to care about more than anything else this Christmas, it’s having food and drink at home, and of course Christmas dinner itself. These top the list of categories that we plan to spend more on this year, no matter which part of the country, and no matter what age group.

As with last year, consumers have consistently told us during 2018 that they expect to spend more on groceries at the same time as cutting back on every other area. But, different to last year, with grocery price inflation having eased, it’s not even as if we’re having to spend more to buy the same things.

Grocers, particularly at the discount end, have responded by introducing even more premium ranges and edible treats. So, while our overall prognosis is for grocers to be celebrating come the New Year, that doesn’t mean that there won’t be winners and losers.

As with every sector of retail, it’s still all to play for as the year comes to a close.

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Lisa Hooker

UK Leader of Industry for Consumer Markets, PwC United Kingdom

Tel: +44 (0)7802 882562

Kien Tan

Director, Retail Strategy, PwC United Kingdom

Tel: +44 (0)20 721 23910

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