A look back at Q3 2024
 

After a challenging first half of the year, according to the Office for National Statistics (ONS), the retail sector experienced a better than expected Q3 performance as retail sales volume and value grew by 2.6% and 2.4% respectively compared to the previous year. Volume (+1.9%) and value sales (+1.6%) were also up on the previous quarter as shoppers found multiple ‘occasion-based’ shopping opportunities to demonstrate their growing confidence. These include back-to-school shopping with sales of computers, additional clothing and footwear bolstering growth. While many consumers continue to hold back on purchasing big ticket items, the sector also saw growth in sales of small discretionary personal care items and in premium food categories, as consumers loosen their purse strings to indulge in little luxuries.

Another positive for the sector came in the form of the first cut in interest rates in four years in August, which saw a rebound in the property market. Inflation falling below the Bank of England target to 1.7% in September for the first time since April 2021 have boosted market expectations for another cut in interest rates in November and December. These results combined with UK wage growth continuing to outpace inflation, should bode well for increased spending during the retailers’ busiest period in the last quarter of the year. 

However, compared to before the pandemic consumers bought fewer goods according to the ONS data, even as they spent more in value terms reflecting the impact of elevated prices since 2021. Recent Kantar data showed that spending on promoted items continued to rise, climbing by 7.4% in September as households sought to manage their finances.¹ Overall, prudence remains and consumers will be awaiting the outcome of the forthcoming autumn Budget and any further interest rate adjustments before loosening their purse strings entirely. The ‘golden quarter’ is already upon us and many retailers will want to see how they perform during their busiest period of the year before deciding whether to make any substantial investments.

Consumers expanding their shopping channels
 

Falling inflation has given consumers encouragement to shop for a wider range of products and across different formats without worrying about price and affordability as much as during the recent period of inflation. Most notably, the number of consumers using speciality food and drink stores for their main grocery shop has increased by two and a half percentage points from 8% in Q2 to 10.5% in Q3 a sign that consumers might be returning to the convenience of shopping close to home rather than spend on eating out. 

The amount spent online, rose by 1.3% during September 2024, and by 6.7% compared with September 2023. The proportion of sales made online increased from 27.5% in August 2024 to 27.7% in September 2024.

Since the boom in online retail during COVID, there has been a rebalancing of the online and in-store channels, with online sales plateauing at around 26% over the past two years. That has left retailers questioning which channel will be more profitable and where to prioritise their investment. Online shopping remains an important part of the growth strategies of many retailers, despite the slow progress towards improving its profitability. 

Retail workers’ rights in the spotlight
 

In 2022, the UK retail sector employed approximately 3.05 million people, accounting for close to 10% of all jobs in the economy. Employment in the retail sector is evenly distributed across various regions and countries of the UK, underlining the widespread importance of the sector for local economies.²

Given the scale of employment within the sector, recent legal cases relating to workers’ rights have been in the spotlight. In August this year more than 3,500 current and former store staff won a six-year legal claim for equal pay against a leading clothing retail chain. The predominantly female retail staff argued that they were receiving lower pay than the predominantly male warehouse workers, but that their work was of ’equal value’, so they should have been paid the same.

It was acknowledged by the Employment Tribunal that the retailer did not discriminate intentionally on gender (’direct discrimination’) but that it had indirectly discriminated against the store staff in relation to some elements of pay, because financial justifications based on ’market rates’ could not excuse unequal pay - employers cannot rely on ’costs alone’ to justify the difference in pay, since this would undermine the purpose of equal pay legislation. The ruling could see the retailer in the case paying over £30 million in compensation by way of back payments. The exact amount of compensation due will now be assessed by the Tribunal but the retailer plans to appeal against the ruling. More than 112,000 store staff are bringing ’similar equal pay claims’ against major supermarket chains.³

In addition, the election of the new Labour government will likely have far reaching implications for retail workers, who will likely benefit from new policies pledged in the Labour manifesto.³ For example, there are plans to address rising retail crime rates, including the introduction of a new specific offence for assaults on shop workers that should protect them from threats and violence. In its manifesto, Labour also signalled an intention to remove the national living wage age bands and to change the remit of the Low Pay Commission so that it accounts for the cost of living: both these measures could benefit some retail workers. 

The new government signalled its intention to act on these pledges immediately with a  wide-ranging employment rights bill, announced in the King’s Speech in July. The bill, which is due to go before parliament in November, is expected to include measures such as ending ’exploitative’ zero-hours contracts, a better deal for new parents, day-one protection against unfair dismissal, and statutory sick pay from the first day of illness.⁴

The bill has received widespread support among business leaders, and many retailers are relaxed about the impact, having implemented many of these policies already. However, there will be concern – especially among smaller and independent retailers – about the impact the legislation might have on rising costs.

Outlook for Q4 2024
 

As we enter the ‘golden quarter’ – traditionally the most important three months of the retail calendar – the outlook for retailers is one of cautious optimism. According to our data, consumers expect to spend more on essentials in the next three months, but less on discretionary items. Concerns about rising energy prices and the continuing hangover from inflation mean that despite improving consumer confidence, households remain prudent preferring to take advantage of higher interest rates to put their higher earnings into savings rather than go on a shopping spree. However, retailers should embrace the upcoming Christmas trading period as an opportunity to entice consumers through targeted promotional activities. With prices much higher than two years ago, consumers are prioritising value and deals as well as spreading out purchases over a longer period leading up to peak shopping season. Promotional events including Black Friday could be an opportunity to re-engage with cautious consumers whose personal finances have improved, and if the Bank of England decides to cut interest rates again before the end of November, consumption could bounce back with consumers borrowing more and saving less. 

Endnote:

1. Grocery price inflation edges up ahead of autumn budget (kantar.com)
2. Retail in Numbers (brc.org.uk)
3. A landmark case for equal pay in the private sector, Kathryn Dooks, Amy Douthwaite, Natalie Bell (deloitte.com)
4. https://www.gov.uk/government/news/what-does-the-employment-rights-bill-mean-for-you