The news: UK retailers are feeling optimistic about sales growth for the first time since September, per the Confederation of British Industry (CBI)’s latest survey.
- Retailers’ expected sales balance rose to +9 for April, up considerably from -18 in March—only the second time it has tilted positive since May 2022.
Signs of growth: Despite the cost-of-living crisis, consumer spending remains robust.
- February sales volumes rose 1.2% month-over-month (MoM), driven by higher sales in non-food stores (which increased 2.4% MoM), per the Office of National Statistics. That’s significantly higher than the 0.2% economists polled by Bloomberg expected—yet another sign of consumer resilience.
- Consumer expectations of inflation are easing. Household inflation expectations reached their lowest point since November 2021, per the Bank of England, which could reduce pressure on businesses to raise wages in line with inflation.
- So are manufacturers’ inflation expectations. UK manufacturers’ expectations for selling price inflation fell to their lowest level since May 2021, according to the CBI’s Industrial Trends Survey, which should lead to some cost relief for consumers.
- And retailers are seeing signs of recovery. Ocado Retail expects business to improve in the second half of the year as its customer base continues to grow. The online grocer said average weekly orders rose 3.6% in Q1, while its active customer base grew 13.8% year-over-year (YoY).
Persistent cost crunches: While there are reasons for optimism, retail growth in 2023 will be tempered by a number of factors.
- Grocery inflation remains at a record high. Grocery prices were 17.5% higher YoY in March, per Kantar data reported by Reuters, adding £837 ($1031) to households’ annual bills. And poor harvests and high energy costs could compound produce shortages and keep food inflation elevated.
- Wage growth is well below inflation. Pay growth slowed in January to 5.7%, per the ONS, significantly below the UK’s current 10.4% inflation rate.
- Shoppers are looking for savings wherever possible. Non-food sales growth in February was driven by more consumers shopping for deals at discount and secondhand stores, an indication that price sensitivity will continue to play a significant role in purchase decisions.
Looking ahead: Retailers will undoubtedly face difficulties ahead as they attempt to convince cash-strapped consumers to spend their money on items beyond groceries. To avoid losing shoppers entirely, companies will need to emphasize value and reward loyalty.
- Despite the difficulties, we expect UK retail sales to grow 1.7% this year, although much of that growth will be driven by higher prices rather than growing sales volumes.