Official data showed that household consumption in the UK fell in the second half of 2024 as cautious consumers chose to save their income at the highest rate since the pandemic. However, there are some signs of improvements since the start of 2025 as recent data from the Office for National Statistics (ONS) shows a rebound in retail sales, with volumes estimated to have risen by 1.0% in February 2025 following a rise of 1.4% in January 2025. More broadly, sales volumes rose by 0.3% in the three months to February 2025, compared with the three months to November 2024, and by 2.0% when compared with the three months to February 2024. These positive results are especially noticeable among the non-food retailers. Sales in household goods stores rose by 6.8%, their largest monthly rise since April 2021, with DIY stores having the largest upward contribution. Within other non-food stores, jewellery retailers reported strong growth due to increased demand for gold because of wider economic uncertainty. Clothing store sales also rose in February 2025, but did not fully recover from their 2.7% fall in January 2025. Increased discounting and falling clothing prices may have contributed to the increase in sales volumes. These rises in non-food retail sales were partly offset by a fall of 2.0% in February in food store sales volumes, following a 4.8% rise in January 2025. Supermarkets contributed the most to the fall, as grocers blame economic factors such as increasing input prices and costs. 

According to our data, in Q1 2025 consumers’ net spending on day-to-day categories, including paying for utilities, rose to its highest level in our survey’s history. Among consumers who spent more, there was a seven percentage point increase in the proportion who blamed higher prices, in a sign of inflationary pressure on budgets. With consumers continuing to compare today’s higher prices to pre-pandemic levels, our data shows that consumers are tactical about their spending prioritising essential purchases, cutting down where they can, and targeting promotions and offers to make their money go further. When asked, 58% of consumers agreed that they have been more careful with their overall spending in the first three months of 2025, and 54% say they have consciously cut down on luxuries or treats.

A view on retail channel performance

With the rate of inflation in food creeping back up, grocery retailers have ramped up their promotional activity to fight for a share of consumer wallets. Sales at supermarkets increased by 1.8% over the four weeks to 23 March 2025 compared with one year ago – the slowest rate since June 2024, according to Kantar.¹ This means that competition for growth and market share among the grocery retailers is fierce. Supermarkets have embarked on a race to cut prices of essentials including investing heavily in promotions to generate volume. Our data reflects this trend with an uptick in the proportion of consumers using large supermarkets for their main grocery shop in Q1 2025. Meanwhile, the rapid expansion of discount supermarkets in recent years has helped those brands fight back as they continue to become established as key players in the main grocery sector. It is difficult to predict what will happen next in grocery retail given warnings of price increases this year. Food price inflation has been gradually increasing since September last year and was at 3.3% in February, its highest level since March 2024.

The amount spent online rose by 3.3% in February 2025 compared with the previous month but fell by 3.1% in the three months to February 2025 compared with the three months to November 2024. The proportion of sales made online as a share of total retail sales increased from 25.8% in January 2025 to 26.5% in February 2025. Online grocery retailers in particular have reported stronger sales in recent months as consumers have chosen to socialise at home and treat themselves through the convenience of delivery of higher-end groceries. At the same time, the growing popularity of social media influencers and the use of artificial intelligence (AI) has also played a part in the continued growth of online shopping. According to our research, more than one in ten consumers (15%) said they have used AI tools as a source of information when choosing what product or service to buy. 

Managing rising costs while offering lower prices to consumers

Like all businesses in the UK, retailers are having to deal with increased taxes and costs following the Autumn Budget. To address these challenges, retailers have been looking to adopt a more precise and strategic approach to cost management. First, retailers should work closely with suppliers to understand the true drivers of cost increases, differentiating between legitimate cost increases and the more opportunistic price hikes. This transparency is essential for negotiating fair pricing and maintaining strong relationships with suppliers. Retailers should also work on reducing the amount of cash tied up in inventory to improve their cash flow and profitability. Retailers will be focusing on reducing stock holding and order quantities, striking a balance between product availability and inventory carrying costs. Businesses will be looking at ways to cut costs out of their operations through efficiencies before offsetting input costs through a freeze on hiring, lower pay and prices increases.

Outlook for Q2 2025

Despite a challenging trading environment, including increased taxes and costs, the prospect of restrictive trade policies, ongoing geopolitical tensions and demand for non-essential goods staying sluggish due to a price sensitive consumer, recent improvements in retail sales are encouraging. According to our data, consumers expect to spend more on both essentials and discretionary items in Q2 2025. The consumer recovery in the months ahead will depend on how inflationary the environment becomes and how manageable higher prices are for consumers especially in the more essential categories like food and energy. However, our confidence index while flattening has not collapsed and with the arrival of spring, conditions could be right for a more sustained recovery of the retail sector in the months ahead. 

Endnote

1. All eyes on price as promotions ramp up