2024 was a year of contradictions. While economic indicators improved, consumer sentiment fell. Inflation dipped under 2% and interest rates were cut. However, the new government quickly fell out of favour with consumers, sending sentiment down after the Autumn Budget, and has remained stagnant ever since.
Overall though, 2024 finished with some optimism for the sector. Performance across a number of retail categories recovered, with grocery in particular benefiting from the lower inflation rate, seeing volume growth for the first time since 2020. And leisure operators also experienced a strong Christmas performance, with pubs seeing a much needed boost in trade.
So how’s 2025 shaping up? On the face of it, household finances are the best they’ve been in three years, with almost two in five having money left at the end of the month. However, inflation remains sticky and interest rates are looking likely to come down slower than expected. When combined with ‘sticker shock’ following a period of high inflation, consumers are understandably cautious about their finances. As things stand, most categories will see more subdued growth as normalised levels of inflation return throughout 2025. The focus for many should turn to taking market share and protecting margins.
In today’s trading environment, retailers need to balance three tough challenges:
Unlock growth in mature and competing markets (market share) and find new sources of growth beyond the core (share of wallet)
Protect margins and invest in new technology, business models and partnerships to be fit for the future
Ensure compliance with complex regulations and enhance reputation among stakeholders – where being a responsible business is as much about what you should do as it is about what you must do
Optimisation of the core business requires a focus on the basics – value, quality and convenience – to enhance the customer proposition and drive operational efficiencies. For some, that will mean serving the most valuable customer segments with a better range, pricing and experience. For others, it will be a focus on rebalancing marketing and sales channels, and managing supply chain risks and volatility.
But unlocking profitable growth is also likely to require finding new sources and opportunities. Those that can establish a pipeline of innovations will be able to create a reason for customers to buy (and buy again). That might be diversifying into new product markets, service offering or geographies where brands can credibly stretch and where there is market headroom. It also might be exploring vertical integration to capture profit pools across the value chain. Or it could be monetising new business models to create new profit streams or rebalancing corporate portfolios to double-down on differentiation.
However, for all businesses, how growth is unlocked is arguably as important as what are the sources of growth. Successful businesses embed better ways of working from simplifying decision-making to embedding a “learning loop” and incubating the innovations teams from the wider business. They invest in technologies that target specific pain points in the front and back office, creating an eco-system of partners across the value chain to co-create and go-to-market. Successful businesses also explore targeted M&A to plug organisational gaps and/or accelerate pace. And the most effective businesses unlock cost savings to fund growth initiatives.
Elsewhere, retailers will need to focus on being a responsible business to meet the expectations of regulators, investors and consumers. They need to navigate complex regulation including the recent UK Employment Rights Bill. But they also need to explore how to embed ESG in the front and back office to deliver sustainable growth.
“Retailers today are navigating changing and competing demands - where the most successful retailers embed agility in their organisation to respond and pivot quickly. They make decisions faster (and learn from them). They make use of partners and select acquisitions. And they continually self-fund growth.”
Jacqueline Windsor
Partner, Strategy& UK, PwC United Kingdom
Retail technology has the potential to unlock profitable growth across the value chain, while serving as a source of differentiation for retailers and brands.
Global spend on retail technology is forecast to grow 10% each year between 2024 and 2028, that’s up from 4% across the previous four year period. But what does that investment look like?
Across commercial functions, retailers are investing in marketing and customer engagement platforms, point-of-sale payment solutions, and omnichannel commerce platforms. This all delivers greater customer reach, higher conversion rates, and a more unified experience.
In addition, retailers are using technology within their operational functions to increase profitability during a period of suppressed margins. For example, security solutions to reduce shrinkage, inventory management and demand planning to optimise supply chains, and finance and resource planning to ensure operational efficiency.
With the proliferation of emerging technology (such as AI) and solutions (including enterprise vs. best-in-class), choosing the right technology can be complex, particularly at a time where retailers are choosing where to invest to gain the most value.
“Retail technology is critical to mitigate headwinds in the short-term, and create sources of differentiation and value in the longer-term. There are opportunities right across the value chain, with technology giving retailers the ability to revolutionise their approach, adding simplification and efficiency to cut-out cost while improving the customer experience.”
Sam Farnfield, Director, Strategy& UK, PwC United Kingdom
Tight margins and a need to find funding for investment mean cost reduction has been front-of-mind for retailers for some time. However, when done right, cost management will support long-term growth.
The stumbling block for many is a focus on short-term cost reduction, which doesn’t then allow for the continued investment needed to drive revenue generation opportunities. A more effective approach is pinpointing resources where they can deliver the most value (‘good costs’), while cutting out effort and less valuable resources (‘bad costs’).
This requires a rethink of what areas of the business are primed for revenue generation and growth and the associated costs and capabilities needed to support this. The costs from non-core areas can be taken out and reallocated to where they can create value.
Think carefully about how your business might change over the next 6-12 months: Will there be a change in business size? A change of channel approach? Will the business look to pursue growth or consolidation?
Ongoing cost management requires continuous reallocation of the right resources to the right places, so retailers can use this opportunity to focus on their strategic imperatives and make cost savings in areas that they may have previously thought untouchable.
“The retail sector already operates on an exceptionally lean basis, so the risk is that those businesses who cut too dramatically – particularly in areas such as technology – find themselves left behind when it comes to capitalising on future growth. Retailers are therefore increasingly turning to technology to create efficiencies for the long-term, while ensuring their customers receive the same – or an enhanced – customer experience.”
Claire Fox, Partner, UK Transport and Logistics Lead, PwC UK
Supply chains are most successful when they enable retailers to respond to consumer behaviours accurately. But with competing priorities (balancing cost, building resilience and meeting sustainability targets), what should retailers prioritise?
Taking a holistic approach can reframe the once-competing priorities of cost, resilience and sustainability into complementary considerations. By putting data at the heart of decision making, retailers can build these priorities into their broader business strategy and pivot from cost to growth.
While any strategic evolution of the supply chain may prove more expensive in the short-term, it will avoid an operational breakdown in the event of a future disruption, creating greater security, providing long-term savings and avoiding reputational damage.
“Early planning and flexibility are key to adapting to unforeseen challenges and ensuring supply chain resilience and reliability. A focus on accurate demand forecasting, diversifying suppliers to mitigate risks, and implementing real-time inventory tracking will remain essential. As will building strong relationships with logistics partners and optimising warehouse operations to help maintain efficiency and certainty of supply.”
Richard Pugh, Director - Deal strategy and operations, PwC UK
Global FDD Leader and Retail, Consumer and Leisure Specialist, PwC United Kingdom
Tel: +44 (0)7802 882562