What happened to retail in 2021, what did we learn and how can businesses respond in 2022?
There were some familiar themes in the retail sector this year, as many of the challenges echoed those from 2020: a continuing global pandemic, further store closures, supply chain pressures, and restrictions affecting footfall and the Golden Quarter trading period, among many others.
But in another show of remarkable resilience, the retail sector outperformed most expectations. We saw a strong recovery from many categories, good trading results over Christmas and consumer confidence remaining above-average levels even with the disruption caused by the emergence of the Omicron variant in late 2021.
Looking ahead to 2022, we’re already seeing trends emerge. Despite the looming threats of continued supply chain disruption, inflation and consumers looking to cut back, there will be growth opportunities. In fact, with our 25th CEO Survey showing 73% of UK CEOs are confident the domestic economy will grow this year and 83% believing the global economy will improve over the next year, there may be lots for retailers to go for.
Despite the pandemic continuing to define retail through 2021, we saw retail sales recover quickly after lockdowns or enhanced restrictions. Even though some fared better than others over the year - grocery performed largely well throughout, while clothing took longer to recover - Christmas trading held up well.
Consumers on average spent £433 on Christmas, a 7% increase on last year (and close to our pre-Christmas prediction of £428). This was largely driven by having more people get together to celebrate at Christmas - a result of relaxed restrictions compared to 2020 - as well as a desire to make the event extra special. As with last year, we saw families spend the most, and younger people spend more.
Unsurprisingly, online was one of the winners again this year but pure online results were impacted by strong comparisons. ONS numbers showed online penetration stabilised at around 27% in December 2021 (down from its 37% peak in February 2021 in the middle of the third lockdown). In the run-up to Christmas, our own survey showed two-thirds of spending on presents was online - down from 71% last year, but higher than 55% in 2019 and 53% in 2018. But that also meant people returned to the high street compared with Christmas 2020.
Overall, we saw a more consistent performance across the Christmas period as trading patterns normalised and the deviation between best and worst performers shrank, compared with 2020.
Grocery performed steadily - particularly premium brands - but did begin to normalise when compared to the record Christmas in 2020, when with tier restrictions in place, we were forced to eat at home. The pent-up demand to spend on eating and dining out - evidenced by the boom in Autumn when there were no restrictions and no Omicron - looks positive for leisure over the coming months, but will be at the expense of grocery.
There may have been strong demand for general merchandise across the year but it was more mixed at Christmas, reflecting stock shortages in certain categories, buying during lockdowns and Christmas not necessarily being a peak buying period for big ticket items. Home accessories, seasonal items and gifting did well.
One positive from the Christmas trading results was the reinvigoration of fashion across mid market and luxury retailers as capacity exited and we had more reasons to shop this year, largely because of our increased desire to go out coupled with not having bought last year.
Overall, we saw the beginnings of a return to normal this Golden Quarter. Consumers fuelled a relatively bumper Christmas, as fortunes reversed for the pandemic winners and demand normalised. Legacy operators enjoyed success, too, as footfall started to return and certain competitors exited.
Ultimately, those who got the basics right saw success. Good retail disciplines were rewarded, particularly for those that focused on margins over sales, or resolved supply chain challenges: focusing on relationships to secure stock, or investing in supply chains and people. 2022 may need much of the same focus as challenges continue around a squeeze on consumer wallets, supply chain pressures and inflation. But there will be opportunities to differentiate and win as we continue to recover.
“Generally, retail held up well in 2021, and Christmas results were broadly positive. That gives cause for optimism into 2022, even with challenges around inflation, interest rate and tax rises, because many opportunities remain: resilient consumer sentiment, employment and wage growth, combined with lockdown savings and pent-up demand.”
Lisa Hooker, Leader of Industry for Consumer Markets, PwC UK
Nearly half of consumers do not expect to be back to normal until 2023. And this nervousness has had an impact on consumer sentiment.
Our January 2022 Consumer Sentiment Survey has seen consumer sentiment fall back slightly to -6. But although it falls into negative territory for the first time since January 2021, it remains slightly above long-run average levels.
We’ve seen sentiment decline across all demographics and nearly all age ranges, with only under 25s showing a slight increase in sentiment. This age group also remains the most positive, as older age group declines are likely driven by the cost of inflation.
Inflation - alongside pent-up demand - is also responsible for the intention behind spending priorities over the next 12 months. Consumers are expecting to spend more on groceries, improving home, eating out and going out relative to previous years. We’re also expecting to spend more on holidays as restrictions continue to ease. Net spending intention is now higher for every category than for the previous two years, even as consumers look to trade down on many categories.
Ultimately, there will be concerns in 2022 for retailers: declining consumer sentiment, inflation, interest rate and tax rises, leisure squeezing retail spend, and a need to focus on ESG. But each of these can offer opportunities: sentiment is still strong, employment and wage growth should remain, lockdown savings and pent-up demand, a continued focus on nesting, and the return of (domestic and international) holidays can be a benefit for areas such as fashion and beauty.
Even with inflation, higher interest rates and tax changes expected to squeeze consumer finances, the UK economy is expected to return to growth, despite challenges around the cost of living, labour shortages and supply chains.
Those retailers looking to win the battle for share of wallet in this low growth environment will need to focus on delivering hygiene and differentiation in five key areas. Mergers and acquisitions or joint ventures are all solutions to these challenges, offering access to new brands, supply chains or customer bases.