Retail sector quarterly update

The UK retail sector experienced a challenging ‘Golden Quarter’ in Q4 2025, with overall sales volumes declining despite a modest uplift in December. This performance was likely shaped by persistent inflation, a weakening job market and cautious consumer sentiment.

Data from the Office for National Statistics (ONS) indicates that retail sales volumes fell by 0.3% in Q4 2025 compared with Q3 2025, marking the seventh consecutive quarterly decline for the crucial festive period. Retail sales were better than expected in the final month of the year, capturing the height of Christmas trading. Some consumers allocated more budget towards spending on gifts and festive treats, with jewellers reporting that precious metals continue to drive demand. But while December saw a 0.4% month-on-month rise in sales volumes, this was insufficient to offset falls of 0.8% in October and 0.1% in November. Uncertainty around the Autumn Budget likely had a role to play in subdued consumer spending during this period as shoppers held back on Black Friday purchases in the run up to the chancellor’s Budget statement.

Declining volume sales in Q4 2025 closed out a mixed year for retail marked by a modest annual increase in sales volumes despite persistent economic headwinds. Retail sales volumes in the UK rose by 1.3% over the year to 2025. This marks the second consecutive annual rise, following a 0.2% increase in 2024, and contrasts with falls experienced in 2023 and 2022. Despite this growth, sales volumes have not fully recovered from the 2023 decline and still remain below their pre-pandemic levels. 

While annual sales volumes saw a modest increase, persistent inflation, a weakening labour market, and subdued consumer confidence continued to exert pressure, preventing a full return to pre-pandemic spending levels. Retailers faced the challenge of balancing rising costs with price-conscious consumers, leading to a focus on value and strategic discounting.

The UK grocery retail sector continues to grapple with persistent food inflation and significant cost pressures, leading to intensified price competition and aggressive price-cutting strategies. Food inflation is still having a significant impact on consumer budgets and purchasing decisions. Indeed, food and non-alcoholic beverages prices rose by 4.5% in the 12 months to December 2025. This persistent, albeit fluctuating, food inflation meant consumers continued to divert spending from discretionary categories towards essentials. And although inflation is predicted to fall towards the Bank of England’s target rate of 2.0% in 2026, the cumulative effect of persistently high inflation means that consumers are still paying more for their groceries and often taking home fewer items. 

As a result, Q4 2025 saw an uptick in the proportion of people seeking out better value, with the proportion of consumers doing their main grocery shop at a discounter rising from 37% in Q3 to 40% in Q4. As a result, the major discounters achieved their biggest share of Britain’s Christmas grocery market to date.

UK online retail sales continued to demonstrate robust growth in Q4 2025, solidifying its position as a critical channel for consumer spending. Data from the Office for National Statistics (ONS) shows that online sales values rose by 2.1% in Q4 2025 compared with the previous quarter and were up 8.4% year on year. This lifted the proportion of sales made online as a share of total retail sales to 28.1% in Q4, up from 27.5% in Q3 2025.

Looking at the year ahead, the increasing integration of Artificial Intelligence (AI) into online shopping is expected to have a discernible impact on internet shopping in the UK, particularly through the increased frequency of AI search referrals. These referrals encompass instances where AI tools, chatbots and personal shopping assistants guide consumers to products and facilitate purchases, potentially altering traditional online retail pathways. Referral traffic from ChatGPT and other AI chats already accounts for 15% to 20% of total referrals for some retailers.¹

Deloitte’s recent Retail Industry outlook report (2026 Retail Industry Global Outlook | Deloitte Insights) shows that Retail executives are aware of the potential disruption, with nine in ten expecting AI to be increasingly used more than search engines by 2026. As a result, the focus for many retailers has now shifted from solely optimising for traditional search engine results to understanding how to gain visibility and facilitate transactions within AI-driven environments. This includes ensuring that their product and pricing data are accurate, accessible and optimised for AI readability so that their products do not become invisible to consumers.

Outlook for Q1 2026

Despite the modest annual growth in UK retail sales volumes in 2025, the sector enters 2026 facing a complex landscape of persistent economic challenges and challenging consumer behaviours. Interest rates continuing to ease as well as signs that consumers are adapting to higher prices offer glimmers of hope, however retailers still must manage continued headwinds that will shape performance throughout the year.

The main challenges for the sector in 2026 are linked to the lingering effects of persistent inflation, a weakening job market, and cautious consumer sentiment. Although the Bank of England indicated that inflation had peaked in late 2025, the Consumer Price Index (CPI) remained elevated at 3.4% in December, with food and non-alcoholic beverage prices continuing to rise. This sustained pressure on household budgets, coupled with the UK unemployment rate reaching 5.1% in Q4 2025 and wage growth easing, means consumers are likely to remain highly discerning with their spending.

The financial strain on retailers was evident in 2025, with profit warnings remaining a concern, reflecting the difficulty in balancing rising operational costs with price-sensitive consumers. Our analysis suggests that while consumers will continue to prioritise spending on essential categories, particularly groceries and utilities, discretionary spending is expected to remain subdued. The shift towards value, own-brand products and promotions, which characterised much of 2025, is likely to persist, although there are early indications that the urgency to cut grocery spend might be waning, potentially allowing for some reallocation of funds within household budgets.

However, there are also opportunities for retailers. The continued growth of online sales, bolstered by the increasing integration of AI into shopping, will enable retailers to enhance the customer experience and drive efficiency. The evolving omnichannel strategies and the demand for hybrid shopping models will necessitate ongoing investment in digital capabilities. Meanwhile, food trends based around growing consumer interest in health and wellness, and weight loss will allow retailers to experiment with new product ranges and services in the year ahead.  

Overall, the prospects for a more robust consumer recovery in 2026 will largely depend on a sustained and significant easing of inflation, further interest rate cuts by the Bank of England, and a stabilisation or improvement in the labour market. Retailers that can effectively manage their cost base, adapt to AI-driven path to purchase, and offer compelling value propositions will be best positioned to navigate the challenging and evolving UK retail environment in 2026.

References

1. 2026 Retail Industry Global Outlook