Data from the Office for National Statistics (ONS) shows that the rebound of retail sales since the start of the year continued, although more slowly, with volumes estimated to have risen by a modest 0.2% in Q2 2025 following a rise of 1.3% in Q1 2025. After falling in May as the sunniest April on record brought sales forward, retail sales rebounded in June with yet another heatwave encouraging consumers to spend across all main categories.

However, persistent inflationary pressures, particularly in food, furniture and household goods, continue to impact sales volumes in the bigger ticket item categories. Overall, consumers have remained cautious, actively seeking promotions and opting for own-label alternatives to mitigate the effects of rising prices. Combined with intense competition, rising costs and economic uncertainty retailers are still faced with a challenging environment. 

With consumers continuing to compare today’s higher prices with pre-pandemic levels, our data shows that consumers are more tactical about their spending cutting down where they can and targeting promotions and offers to make their money go further. However, while on balance there is a higher proportion of consumers agreeing they have adopted more defensive behaviours, that net proportion has eased off this quarter compared with the previous quarter. Consumers remain cautious but they are much more intentional with their spending compared with the pre-2022 period. They are driven by a desire to bring joy back despite the pressures on their finances and are prepared to make some sacrifices in places to allow to spend more freely in other areas. 

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. In this climate, we are seeing discount retailers and those with very strong digital capabilities outperforming more traditional, smaller players.

The amount spent online rose by 3.3% in Q2 2025 compared with the previous quarter. The proportion of sales made online as a share of total retail sales increased from 26.6% in Q1 to 27.4% in Q2 2025.

Online grocery retailers 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) have 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 should adopt a more precise and strategic approach to cost management. First, retailers should work more 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 work on reducing the amount of cash tied up in inventory to improve their cash flow and profitability. It is important they focus on reducing stock holding and order quantities, striking a balance between product availability and inventory carrying costs.

Businesses must look at ways to cut costs out of their operations through efficiencies before offsetting input costs through a freeze on hiring, lower pay and price increases. Retailers need to be more deliberate about where they invest. With a more discerning consumer, retailers should ensure they focus on the products and services closest to the heart of their business, where their competency lies, to support growth. At the same time, additional growth opportunities might be available to those retailers who can target new consumer segments and identify and scale alternative revenue streams. Capitalising on retail media, offering capabilities as services, and monetising data could create new revenue streams and improve profitability.

Outlook for Q3 2025

Despite a challenging trading environment, including increased taxes and costs, ongoing geopolitical tensions and demand for bigger ticket items remaining sluggish, recent improvements in total retail sales are encouraging. However, according to our data, consumers expect to spend less on both essentials and discretionary items in Q3 2025. To entice price-sensitive consumers to spend, retailers need to respond to changing customer preferences by offering competitive pricing and focusing on value offering. Retailers that are accelerating their transformation and adopting a more strategic approach to cost management are beginning to see the benefits.

Major investment in data and AI to personalise the customer experience, exploring new revenue streams, and streamlining operations to achieve greater efficiencies are showing in some retailers’ performance data. Overall, 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.