With over 30 years of experience in the retail sector, Martin Carr has held a diverse range of leadership roles including CEO, Chairman and General Manager in the UK, as well as across Asia and Australia.
Here, he speaks to Nick Berman, Business Consulting Partner at Eton Bridge Partners, about his reflections on the world of retail in 2023, and what we can expect to see in 2024.
Nick Berman: Martin, what are your observations on the retail sector’s performance towards the end of last year?
Martin Carr: Last December we saw weak Christmas trading reflecting the economic strain in the UK with both the ONS and the British Retail Consortium (BRC) reporting poor sales, particularly in December. The BRC reported a meagre 1.7% rise in year-on-year sales in December which, given price inflation, represents declining volumes across all categories. The ONS echoed this when they announced a significant slowdown in December and a second consecutive year of volume declines reaching the lowest sales since 2018.
Cost of living pressures and reduced footfall were cited as key reasons for the poor December sales. November was a little better with Black Friday promotions encouraging customers to shop early and spread the Christmas spend, but overall the peak trading quarter was very disappointing.
NB: So with the sales overall looking disappointing, was there any sector in particular which did well?
MC: Yes, despite the macro bad news, not every category or retailer performed badly. Essential spending, especially on food and groceries, performed well with Christmas eating and drinking being prioritised above everything else. Kantar reported that the Christmas season proved to be highly lucrative for the grocery industry, surpassing £13.7 billion in sales for December. This translates to an average of £477 per household, marking record-breaking figures. The individual sales reports from most grocers, including M&S food, Sainsbury’s, and Tesco, have showcased robust performance, with growth exceeding 6%, driven heavily by their investment in own brands and value ranges to attract more cost-conscious shoppers. The discounters Aldi and Lidl also saw further sales growth reaching a record 17% market share combined. Other grocers performed less well with low, single digit growth. With food inflation at 6.7% for December, volumes clearly went backwards for the sector as a whole, but significantly for some.
The outlook for the grocery sector is certainly looking more challenging. Recent sales growth has all been inflation driven and as the rate of inflation declines, it is unlikely that consumers will want to increase the volume of their weekly food shop, suggesting that sales growth for the grocers will be much harder to come by.
NB: Given the increased cost of the weekly grocery shop in a cost-of-living crisis, I guess there wasn’t much left for consumers to spend on non-essential items? Did we see a change in this area?
MC: Yes, gift giving was restrained, we saw that the price of gifts was lower, and affordable ‘treats’ were favoured over high priced and luxury products.
Clothing, home, jewellery and technology sales were disappointing with the luxury fashion finding things particularly tough. The luxury sector has traditionally weathered downturns well given the relatively protected disposable income of more affluent consumers. However, this year things have been different with belt-tightening in most income groups. These challenges have been compounded by lower tourist spend on luxury items since the axing of the VAT free shopping scheme. A policy the government are coming under increasing pressure to revisit.
In other clothing and home categories there were some notable out-performers. Next and M&S (clothing and home) posted strong sales growth for the peak period. Both players now offer a wide selection of brands curated to sit alongside ever improving and well-priced own label products. Their partnership and acquisition strategies paying dividends, not only for them, but also for the brands that they host and have partnered with.
With very few other exceptions, the rest of the clothing and home sector struggled, and many will now be faced with a difficult task of clearing inventory and generating cash to fund the new season.
The one non-essential category that did perform well was health and beauty. For gifting and ‘self-gifting’ the beauty sector offers many brands and products that suit more cost-focussed Christmas shoppers. Boots, Superdrug and Bodycare announced healthy sales growth and others in the sector are likely to follow. Health and Beauty was perhaps the only non-essential category to deliver growth, amid a pretty bleak winter for the retail sector.
NB: What factors do you think have contributed to the shift in shopping channels, and how is the evolving landscape expected to impact retailers and investors in terms of business models?
MC: The shift in shopping channels from bricks to clicks and back to bricks has dominated the retail debate over recent years. After the pandemic shoppers returned to stores and much of this trend has remained. Christmas sales saw modest growth in the share of spend online, partly driven by weaker comparisons due the postal strikes in December 2022 and also a longer final pre-Christmas week driving a burst of last-minute online shopping. Despite that, many online pure-players are seeing sales decline prompting many (myself included) to suggest that ‘digital only’ will never win over multi-channel given consumers’ desire for both physical and digital touchpoints.
Going forward there is much more stability expected in offline/online sales trajectory with both channels expected to fall and rise with the market, giving retailers and investors more clarity on business models than they’ve had for many years.
NB: Martin, what do you think we can expect looking ahead into 2024?
MC: Many economists are saying that the worst is over, and the future is bright. Inflation is falling, real wages are rising, and interest rate reductions are on the horizon bringing some relief to mortgage holders. Perhaps it is not surprising that there has been a rise in consumer confidence in January according to GfK’s consumer confidence index. Whilst the GfK measure is still firmly negative, it is at its highest levels in 2 years. However, with general elections here and around the world this year, continued international conflicts and disruptions to shipping, there are plenty of reasons why confidence may be unsettled.
The CBI have just announced that January sales have fallen even faster ‘to the lowest levels since January 2021 when the country was in lockdown’. Their expectations for February are no better. The first quarter of the year is usually a tough time for retailers anyway and if consumer spending is as low in the quarter as suggested it could be a make-or-break time for some retailers.
Despite inflation declining and wages increasing, disposable incomes are likely to remain under intense pressure and I don’t foresee a rush back to non-essential spending in the short term, perhaps not until much later in the year. Though that may be in time to deliver a much better Christmas for the sector than the one we’ve just endured!
NB: What would you say were your top priorities for business leaders in the retail space to consider for the year ahead?
MC: The retail sector has never been more volatile, nor the consumer more powerful. With another challenging year ahead to navigate, the winners and losers will be defined by their priorities and how and where limited resources are focussed.
The first 2 business priorities are around business protection:
- Be ruthless to protect cash – poor inventory management and working capital controls can be the Achilles heel of many retailers. For some, cash is survival, for others it is having the ability to invest and strengthen. For every retailer, it is critical.
- Focus on the winners – be it products, categories, ranges, stores, or regions. There are parts of every business that deliver profitably and some that don’t. Far too often parts of a business are retained because ‘it’s always been here’ or ‘it’s important to the brand’ even though they are unprofitable. Poor performing elements absorb time, cost, and cash and if they can’t be turned around, they should be jettisoned.
You then should be looking to the priorities for business growth:
- Make your stores sing! – Physical shopping may have a more certain future, but consumers are more demanding than ever. They need theatre, excitement, engaging service and a strong, seamless connection between the stores and online.
- Really understand your customer – Take steps to understand how and where they engage with your brand or your competitors’ brands. Fully embrace social media channels and influencers that reach your Channel your marketing and don’t plough money aimlessly into untargeted paid search.
- Develop new partnerships – collaborations and marketing with third parties and hosts extends a brand’s reach, is capital ‘light’, can add credibility and breathe new life into a brand. This strategy has worked well for many in the last year.
- Don’t fear AI – Educate your teams, understand what it can do for your business and what opportunities it brings to drive top line, save costs and future proof your business.
…And I’ve assumed ESG is permanently on the agenda. It should be at the forefront of everyone’s mind and part of the DNA of your organisation.
If you would like to have a discussion around any of the topics discussed, or another aspect of driving a profitable retail business through challenging times, please do reach out to Nick or Martin directly.
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