Amid the top-line triumphs of certain high profile retailers being trumpeted in the media, the early judgment on the 2024/25 festive season has been largely negative. This article considers the position of retailers after a disappointing Christmas. The fear is that disappointing trading has left many businesses in a risky position ahead of the Budget cost implications set to take effect in April.
We published our latest sector review into retailing in December 2024, warning how crucial the Christmas ‘golden’ quarter would be in the context of the sector’s generally weak finances and highlighting the threats posed by the government’s tax raising measures in the October Budget.
The potential plight of retailers comes against a background of concern about the UK economy, which is hitting both consumer and business confidence and now seems to have leaked into the vital bond market, raising the government’s borrowing costs and hitting the value of sterling.
How bad was Christmas 2024?
- Figures from the British Retail Consortium (BRC) show sales growth over the golden quarter between October and December came close to flatlining.
- For the three months to December, when many retailers make the bulk of their annual profits, the BRC reported that total UK retail sales growth was 0.4% year-on-year as shoppers prioritised spending on food and drink over the festive season.
- For the year as a whole, total sales increased by 0.7% from 2023, highlighting a cautious approach to consumer spending as households continue to grapple with higher prices after the worst inflation shock in decades.
- Once inflation is taken into account, retail sales by volume fell in 2024.
- Separate figures from Barclays show zero growth in consumer card spending in December, as households cut back on essential items, pub and restaurant meals in favour of spending on experiences.
Top line vanity, bottom line sanity
The challenge with all of these statistics is that from a commercial viability and financial risk point of view, they focus on the least important aspect of retail trading, the sales performance. The key question is, what profit did the business earn over Christmas?
A highly revealing figure published by the BRC showed that Black Friday actually created price deflation in December 2024. Non-food prices fell by 2.4% in the month according to the BRC-NielsenIQ Shop Price Index. Unfortunately, this was not an isolated occurrence. Shop prices have been falling since August 2024, when they turned negative for the first time in three years. Given the surge in costs experienced by retailers in 2024, what impact did this price drop have on profit margins – whether or not the resultant losses are hidden in the advertising and promotion cost line?
What will be far more telling is to ignore the like-for-like sales utterances from retailers and wait for their next set of full results, to see what their true profitability is and what over-stocking and debt burden horrors are lurking in their balance sheets.
Price rises will surely dominate 2025
Pretty much every major retailer, notably including such market leaders as Next, M&S and Sainsbury’s, have taken the opportunity in announcing their Christmas sales figures to warn that they will have to increase prices to compensate for the Budget cost increases now estimated by the BRC to be £7bn for retailers. They say that they will do all they can to mitigate these increases, but they are unavoidable.
The BRC has done some modelling with retail CFOs, which indicates that food prices are set to rise by 4.2% in the second half of 2025, while “non-food will return firmly to inflation”.
How will shoppers react to higher prices?
CPI inflation has hardened a little above the Bank of England target rate of 2% and is now predicted to average 2.5% in 2025, but core inflation excluding more volatile items like housing and energy costs was 3.5% in November 2024, while services inflation was 5%. Pay increases remain above inflation at 5.2%, allowing consumers to continue repairing their battered disposable income profiles and some of them to pay down personal debt, but they are slowing.
Consumer confidence is a delicate flower in the retail garden, especially at a time of such widespread geopolitical uncertainty. If the current pressure in the bond markets spills over from just hiking government borrowing costs into more general rises in mortgage and other interest rates, it isn’t hard to foresee a further hunkering down in spending amid the sound of shoppers’ wallets slamming shut.
The year ahead looks challenging at best and seriously gloomy at worst for retail profits, for retail investment, and sadly, for retail employment. Unfortunately, there will be casualties and more of them too than the 2,037 retailers who filed for insolvency in the twelve months to October 2024.
If you are considering professional advice for your business, Opus is here to provide independent assistance. You can speak to one of our Partners, who can discuss options with you. We have 14 offices nationwide and by contacting us on 020 3995 6380, you will be able to receive immediate assistance from our Partner-led team.