2022 was quite a year for the retail sector. Consumer sentiment continued to fall throughout the year, from its high in Summer 2021, as the cost-of-living crisis bit and inflation increased pressure on already tight margins. But we also saw store closures ease and a blockbuster Black Friday. After a lot of negativity in the press and nervousness in the market, we even had a surprisingly positive Christmas trading period for many. As we move into 2023, will this volatility remain and how should retailers respond? And what are the trends that they need to focus on for success?
The success of this year’s Golden Quarter was defined by four key takeaways: Normality, accessibility, attractiveness, and polarisation.
- Normality - A return to a more normal Christmas saw many of us getting together with loved ones, which encouraged greater spending.
- Accessibility - Winners this year were those in the right location and across multiple (and sometimes unexpected) channels, such as other people’s stores, websites and marketplaces. Convenience was also important for consumers, whether concerning opening hours, easy click-or-collect or effective use of technology.
- Attractiveness - Value for money was more critical than ever to consumers. Not just the lowest price, but factors such as quality, price per use, innovation and investment in products and ranging that allowed shoppers to trade up and down to match their finances.
- Polarisation - We saw a continued polarisation of shopping spend and trends across age groups and earning demographics. Discounters and luxury retailers both performed well, but for different reasons, and we saw consumers trading up and down across the festive season. These trends are unlikely to abate any time soon, so retailers will need to adapt to their consumers’ position for success.
Watch the recording of our Retail Briefing 2023, where we explore the all-important Christmas trading period, underlying trends and themes behind a quite positive Golden Quarter. We also look forward to the economic, political and consumer outlook for the year and what this all means for the market, retailers and consumers.
What’s the outlook for 2023?
We’re cautiously optimistic about the year ahead. While it may not deliver the surprise success that we saw in 2022, there will be opportunities for retailers that get it right. It will, however, remain a challenging environment, for some areas more than others.
Our January Consumer Sentiment Survey has seen consumer sentiment improve slightly to -32 (from -44 pre-Christmas). While it remains firmly in negative territory, it is beginning to trend in the right direction. Most consumers are just about making ends meet, with even a small improvement in consumers’ financial situation - 9% now tell us they are either struggling or in trouble, slightly down from 13% in September 2022.
But even though inflation will ease, other financial concerns and job security will see consumers cut back. The cost of living crisis will continue to dominate thoughts, with 57% expecting to spend less because of the rising costs of everyday products. Elsewhere, worries over income (37%) and debts (37%) will also affect what people spend this year.
That will see discretionary spending squeezed over the next 12 months, with eating out, going out and clothing likely to be hit the hardest. Even in grocery there’ll be more switching and trading down, and we’ll also see many cut back on hospitality spending over the next year, similar to what we saw in the last recession when discretionary spending was being squeezed.
Even so, in more positive news, all consumers’ net spending intentions have increased slightly since the Autumn. And people tell us they intend to prioritise experiences, home and family this year.
We’re now starting to see significant polarisation between those who are financially healthy and those struggling. The youngest and oldest age groups are now likely to be the most protected, with 25% of over 65s and 20% of under 25s expecting to keep up their standard of living - largely a result of younger people living at home and getting wage increases, and older people having savings and benefitting from the pensions triple lock - compared to only 9% of 55 to 64 year olds. And that polarisation is evident not just in how much they’ll spend, but what they’ll spend on and where they’ll spend it.
Trends for 2023
Our findings highlight a need for interventions if retailers are to find long-term viability and growth, and win share of wallet. From accelerating transformation through technology to capitalising on changing consumer trends, or from building greater supply chain resilience and sustainability, to investing in financially sustainable business models, there are actions retailers can take for success this year and beyond.
Finding value in challenging times
Our 26th Annual CEO Survey recently highlighted that 40% of UK CEOs told us they feel highly or extremely exposed to inflation in the next 12 months. And with consumers also feeling the effects, it’s not as simple as passing the cost along.
Resolving this challenge will require finding the right balance of priorities to address longer-term challenges while being able to apply short-term fixes. That’s likely to require a complete rethink across areas such as savings and investment, transformation, ESG and partnerships.
For retailers, rethinking savings and investments is critical. Cutting costs across the board is an ineffective strategy that is likely to undermine future success. A better option is to focus on the ‘good costs’ that boost capabilities and drive value while eliminating the ‘bad costs’ in areas such as process inefficiencies and working capital leakage.
“There are no easy answers to the current inflationary spiral, but retailers need to juggle short-term challenges with the desire to accelerate their ambitions in the longer term. Resetting your cost base to match your strategy can be a strong first step.” —Claire Fox, Retail Partner, PwC UK
While inflation continues to bite, some retailers may look to not only reduce costs but scale back investments. But difficult trading conditions can often be a good opportunity to accelerate renewal, particularly for those that take a strategic approach to investments.
Organisations should be seeking out visionary ways to protect and deliver value, showing innovation to identify new opportunities, and using technology to help realise deal and investment success. For some, that could be finding growth through acquisition. For others, that may be finding ways to share fixed costs or consolidate. Our newly launched Global M&A Trends in Consumer Markets: 2023 Outlook suggests that retail and consumer markets investment activity will continue to be strong, particularly across grocery, consumer goods and consumer health.
“Organisations should go back to some of the basics around investing. So not only investing in your core strengths but also scenario planning, modelling and understanding where risks and opportunities are, while staying true to the fact that value is ultimately created through a clear purpose, the right people and technology enablement throughout.” —Tim Allen, Deals Industries and International Leader, PwC UK
Capitalising on any investment strategy is likely to mean complementing deep industry and market experience with powerful data-driven insights and digital innovation. Those who do will have a clearer picture of the current environment, and much greater certainty over investment choices, as well as new ways to create value.
Take Coty, for example. Having technology at the heart of its value creation, means Coty can use it to better understand its business, focus on customers, rapidly develop new products, target advertising effectively, and operate more productively and efficiently. “We are a beauty company, not a tech company,” says Jerome Auvinet, Coty’s Chief Information Officer. “But tech is everywhere. It is a route to spending less and spending better, allowing us to free up investment to work on compelling and innovative products .”
To see how all organisations can strike the right balance to create value and deliver on their vision, watch our Human-led, Tech-powered series.
Secure supply and strengthen sustainability
Understanding and addressing supply chain issues is also likely to be near the top of retailers’ agendas again in 2023. And much like last year, those who have strong supplier relationships or have invested in their supply chains will see the most success.
“Global supply chain issues and logistical disruptions continue to rumble along, and they look unlikely to be resolved any time soon. But even amid all this uncertainty, there are opportunities to diversify, explore new technologies and strengthen relationships with consumers. More than ever, brands need to support their suppliers, to preserve a strong and diverse sourcing base. And by working together they can even innovate their supply chains, to improve resilience and find greater efficiency.” —Miles Lethbridge, Director, Logistics Leader, PwC UK
Some retailers have taken the opportunity to acquire their own supply chains for security and certainty, purchasing logistics providers to take control of their end-to-end supply chains and meet the way consumers now shop. Others have embraced logistics outsourcing as a way to differentiate operations and build resilience.
However you choose to do it, getting control of your supply chain is also an effective way to take charge of your journey to net zero. With 43% of organisations telling us they’re investing in technology, and 55% in skills and capabilities to help with that agenda, ESG and sustainability remain an important focus for organisations and consumers.
One success is Nestlé, which has invested in digital, manufacturing and sustainability, particularly throughout its supply chain. Interviewed for PwC’s 26th Annual CEO Survey, Nestlé CEO Stefano D’Agostini says: “As a food manufacturer, almost two-thirds of our greenhouse gas emissions are produced by sourcing the raw materials that make up our products. That’s why we’re working closely with our suppliers and farmers and investing in nature-based solutions.”
With up to 97% of an organisation’s emissions coming from its entire value chain, getting scope three emissions under control is vital. Getting this information and then having the skills to stay on track or transform can be difficult. But ESG must remain a focus for retailers, who will need to navigate consumer spending pressure and legislation and reporting requirements, alongside internal stakeholders.
“Profit and purpose can no longer be mutually exclusive. Embedding positive change into business strategy requires understanding, insight, leadership, and robust data and reporting. Only then will organisations see where change is needed, be confident enough to make those necessary changes and confirm that those actions meet the needs of stakeholders and consumers alike.” —Lynne Baber, Sustainability Practice Leader, PwC UK
Also integral for brand reputation will be the ability to focus on the people and social element of ESG, not just net zero. There will be opportunities to win by leading customers and value creation through purpose, to develop the right strategy and differentiate the brand.
Watch Purpose and Profitability - part of our Human-led, Tech-powered series - to see how organisations can align investment and innovation plans with purposeful commitments to create fair outcomes for all, as well as the importance of technology in delivering this.
Transform for the better around your customer
All organisations are under a pressing need to transform, with 22% of UK CEOs believing their business will not be economically viable within a decade on its current course. But how can retailers do so in a way that keeps the trust of its people and consumers?
We know that consumers have changed, with polarising shopping preferences that mean price, range and convenience are no longer the drivers of a purchase decision they once were. New tools and channels mean their needs, journeys and interactions have transformed too, with people no longer acting in the way many behaviour models predict.
Only those businesses that transform for the better around their customers will meet expectations and grow responsibly. For many, that might mean doing something out of the ordinary, in an effort to create experiences that are guided by customers' needs and behaviours, as well as data and insights.
“By correlating what customers want with what the market is doing, and combining data, tech, talent, and creativity, retailers can transform at pace while being able to predict and respond to any unintended consequences. In turn, that gives them the confidence and certainty to offer new products or services that meet evolving customer needs, engage with different demographics, create richer end-to-end experiences or explore new markets.” —Tom Adams, Experience Consulting and Marketing Transformation Leader, PwC UK
That might be focusing on how to better target customers for more efficient, effective and ethical outcomes. It might be improving the end-to-end customer experience, or even entering new markets or creating new products.
For many, managed services might be a solution. Not only can they give retailers instant access to leading technologies, but can free up people to focus on adding value, whether that’s helping to create better communication with customers, understanding and solving their problems, or assessing and improving collective capabilities.
Marketing is an example of one area where retailers can transform technology use and skills to become a strategic driver of long-term growth and brand value.
Another is frictionless retail. Although frictionless and computer vision AI technologies are in their relevant infancy in retail, recent PwC research shows that both consumers and retailers are willing to explore these technologies. More than just saving on labour and improving customer experience, frictionless retail and AI promise to revolutionise how customers shop and retailers operate.
“Seamless and connected experiences for retailers and customers will play a key role in enabling greater customer insights and personalisation, as well as detailed planning and analytical capabilities for retailers. These technologies are already present in today's society as trials, but they will become the standard for retail across various channels. Retailers that embrace this trend early stand to gain a significant first-mover advantage.” —Oz Ozturk, Head of Technology Alliances, PwC UK
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Leader of Industry for Consumer Markets, PwC United Kingdom
Tel: +44 (0)7802 882562
Partner in Strategy& Deals Consumer Markets and Head of Retail, PwC United Kingdom
Tel: +44 (0)7801 074739
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