The last three months of the year should represent the busiest period for retail but in a sign of a weaker economy, retail sales volumes fell unexpectedly by 0.8% in Q4 2024, when compared with Q3 2024 according to data from the Office for National Statistics (ONS). However, when compared with the same period a year ago, there was a 1.9% rise. More broadly, retail sales volumes rose by 0.7% in 2024, following a fall of 2.9% in 2023 and of 4.1% in 2022. Although this marked the first rise in three years, sales volumes have not returned to 2022 levels.

Despite some favourable economic conditions for consumers such as rising real earnings, house prices going up and unemployment still low by historical standards, consumer spending remained subdued coinciding with consumer confidence stalling in Q4. When asked about their expenditure over the Christmas period compared with 2023, more than two in five consumers (44%) said they had less money to spend and more than one in two (54%) agreed they spent more because of higher prices. One in two consumers (52%) also agreed that they have been generally more frugal this Christmas and the same proportion (50%) said they have consciously cut down on any luxuries.

A view on retail channel performance

Recent Christmas trading updates point to the major grocery retailers doing better than non-food retail, especially those supermarkets that invested heavily in their loyalty schemes or promotions to generate volume. Although this might have been challenging for the discount supermarkets, the rapid expansion in recent years of some of the larger discount brands, combined with the economic slowdown, has helped those brands become strongly established in the main grocery sector. It is difficult to predict what will happen next in grocery retail given warnings of price increases this year following the Autumn budget. Food price inflation has been gradually increasing since July last year and rose to 3.7% in December, its highest level since March 2024.¹

Meanwhile, the amount spent online rose by 1.5% during December 2024, the first monthly rise since September 2024, but fell by 3.3% in Q4 2024 compared with Q3 2024. The proportion of sales made online as a share of total retail sales increased from 26.5% in November 2024 to 27.1% in December. In a sign of a rebound in online sales, some retailers have reported stronger sales in their online channel despite their in-store sales declining. Consumers seeking value will have gone back to online shopping to compare prices before purchasing. The growing popularity of social media influencers and the use of artificial intelligence (AI) will also have played a part in more people shopping online. According to our research, close to one in five consumers (18%) said they have used AI tools as a source of information when choosing what product or service to buy. 

Signs of a recovery in demand?

The strong performance at some food retailers has been at the cost of the more discretionary expenditure, non-food and big-ticket items sales continue to be slow or falling as consumers trade-off for cheaper alternatives or cut down on non-essential purchases altogether. Overall, despite their improved personal finances consumers are still hesitant to spend, as even with inflation slowing, they cannot help comparing today’s higher prices with those before the pandemic. However, there are some encouraging signs. Our data shows that the rate at which consumers adopt more defensive shopping behaviours, such as buying goods on promotions, making use of loyalty scheme to save or buying cheaper brands, slowed in Q4 compared with last year. The question remains whether this was due to some consumers loosening their purse strings during the festive period or the start of a more established bounce back in demand.

Outlook for Q1 2025

Growth in the retail sector faces a number of threats in the year ahead. These include the prospect of restrictive trade policies, ongoing geopolitical tensions, uncertainty around fiscal policy decisions in major economies, an increasing regulatory burden and the potential for another year of subdued consumer spending. According to our data, consumers expect to spend more on essentials in the next three months, but less on discretionary items. Concerns about rising food prices and the continuing hangover from inflation mean that households remain prudent. The consumer recovery this year 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. As a result, consumer demand might remain subdued in the first half of this year. In the second half, we should see demand improving especially in the more discretionary categories, supported by the rise in the minimum living wage, easing monetary and fiscal policies, and consumer confidence recovering.

There are some opportunities for growth for the most progressive retailers that continue to innovate and adapt by finding new sources of revenue. According to Deloitte’s latest Retail Trends , there are substantial opportunities not only in targeting generation Alpha, defined as those born since 2010, but also by capitalising on the growth of the health and wellness sector including in the beauty and alcohol-free drink sectors. In addition, technology including AI will help retailers find efficiencies and improve effectiveness, and better target evolving consumer needs.

Endnote:

1. Household spending reaches new high as shoppers splash out on premium lines and festive fizz